Axioma Risk Monitor
Equity edition

Volatility and correlations loosen their grip; Wide dispersion accompanies developed markets recovery; US Momentum decouples from peers




Volatility and correlations loosen their grip


Volatility and correlations are finally easing around the globe. The latest charts of global volatility and correlation hotspots were peppered with downward arrows, reflecting sharp decreases in volatility and correlations at the individual country level. Axioma’s Worldwide short-horizon fundamental model showed that volatility fell more than one percentage point, while correlations declined by more than two percentage points last week in a number of countries, particularly in Europe, Asia and South America. The decrease in both components of risk suggests that managers should take a particularly close look at the active risk of their portfolios, with a focus on the sources of the largest changes.

See graph from the Equity Risk Monitors as of 31 January 2019:


Wide dispersion accompanies developed markets recovery


Asset dispersion remained relatively wide for FTSE Developed Markets last week, as stocks ended January with gains. Winners dominated losers over the past five weeks, in stark contrast with the prior five weeks. FTSE Developed Markets recorded a cumulative monthly gain of 8% in January, while risk for the index increased about 10 basis points over the same period. FTSE Developed Markets’ short-horizon risk exceeded 18% last Thursday, as measured by Axioma’s US short-horizon fundamental model. Dispersion, the cross-sectional standard deviation of weekly returns, remained relatively wide in the FTSE Developed Markets since the beginning of January, an indication of more opportunity for active managers to add value in Developed Markets.

See graph from the Developed Markets Equity Risk Monitor as of 31 January 2019:



US Momentum decouples from peers


Currently, US Medium-Term Momentum’s correlations with most other style factors in Axioma’s US4 medium-horizon model are negative. Momentum and Value recorded the largest negative correlation (-0.36) among US style-factor pairs as of last Thursday, suggesting that Value stocks lack momentum, and that high Momentum stocks do not necessarily offer good value. In contrast, Momentum’s correlation with Growth was the highest at 0.39 points. The only other factors showing positive correlations (albeit of small magnitude) with Momentum were: Size (0.12) and MidCap (0.03). Since the beginning of the year, Momentum’s correlation with Value, Leverage, Dividend Yield, Liquidity, Market Sensitivity and Volatility became more negative. Investors tilting their portfolios on multiple style factors may see a big and unexpected impact on their portfolio risk due to changing factor correlations.

See graph from the US Equity Risk Monitor as of 31 January 2019:



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On the Blog

Why is the US risk contribution suddenly so big?

In our recent Q4 2018 Risk Review webinar and research paper, we noted a sharp increase in the US’s contribution to overall risk in global developed-markets equity benchmarks.

5 things to look out for ahead of a yield curve inversion

Fears of an impending yield curve inversion—usually a harbinger of economic downturn—have been somewhat mitigated thanks to the recent downward revision of rate forecasts by a number of Federal Open Market Committee members.

Recessions, Expansions and Factor Performance: Not Much of a Factor-Timing Strategy

Given the recent inversion of the yield curve, and with companies like Apple guiding earnings estimates down, not to mention concerns about the impact of the US government shutdown and other issues, there’s more than just a whiff of a recession in the air.

Latest Research

Q4 2019 Insights: Risk Finally Rears Its Ugly Head

What a quarter, and year, it was. Most markets finished 2018 under water, while volatility soared around the globe. Our Applied Research Team offers a full debrief and analysis of risk during the year and Q4 in this whitepaper.

Crowded Trades Don't Explain Managers' Recent Pain

It has been a tough couple months for many managers, especially hedge funds. Some have speculated that there has been a large unwinding of crowded risk-factor positions. We do not see that in our factor returns, and instead propose a few other possible culprits.

The Year of the Central Banks

2019 will be a decisive year for three of the world’s biggest central banks. In this paper, we use the stress-testing capabilities of our Axioma Risk™ platform to examine the impact of rate hikes on a global multi-asset class portfolio, with a particular focus on equity and credit spread performance in response to a yield curve inversion.

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Olivier D'Assier, head of applied research for APAC at Axioma, is hopeful for a positive outcome of the U.S.-China trade talks.

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Axioma’s recently launched axiomaBlue platform delivered the win in the best new technology (infrastructure) category at this year’s AFTAs.

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Axioma announces that it has released a new China equity risk model (AXCN4) as part of its next-generation Equity Factor Risk Model suite.


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