Axioma Risk Monitor
AXIOMA RISK MONITOR
Equity edition

Emerging Markets now less risky than Developed; UK large cap stocks outperform; Asset correlations in Japan make a U-turn

 

HIGHLIGHTS FOR THE WEEK ENDED FEBRUARY 7

 
 
 

Emerging Markets now less risky than Developed

 

As stocks recovered around the globe in 2019 and risk declined, Emerging Markets became less risky than Developed Markets. The risk forecast for Emerging Markets has declined more than 220 basis points, while for Developed Markets only 55 basis points since the end of December, as measured by Axioma’s Emerging and Worldwide short-horizon fundamental models, respectively. The ratio between FTSE Emerging and Developed short-horizon risk forecasts dipped below 1, dropping from a high of 1.9 in late September. That is, Emerging Markets’ risk was almost double that of Developed Markets only three months ago, but at 16.5% as of last Thursday, it is now 90 basis points less risky than FTSE Developed.

The chart below does not appear in our Equity Risk Monitors, but can be provided upon request:



 

UK large cap stocks outperform

 

UK large cap stocks fared better than their small cap counterparts amid both Brexit-related turbulence and the Bank of England’s forecast of slower economic growth last week. The Size factor return in Axioma’s medium-horizon fundamental UK model was positive for the one-week and one-, three-, and six-month horizons as of last Thursday. This indicates that large-cap stocks strongly outperformed small-caps over these horizons. The six-month cumulative return for Size of 2.8% was the highest among the positive returns of all style factors in the model. However, in absolute terms, Volatility and Short-Term Momentum saw much larger magnitudes of six-month returns, of -4.9% and -7.5%, respectively. Other regions also experienced outperformance of large caps over the same period.

See graph from the UK Equity Risk Monitor as of 7 February 2019:

 

 

Asset correlations in Japan make a U-turn

 

Despite a decrease in asset correlations and the volatility of Japanese stocks, the country is now riskiest (in local currency) among the geographies Axioma tracks closely. After rising sharply in December, and holding steady at around 0.70 in January, the median pairwise realized 20-day stock correlation in the FTSE Japan index plunged in February, dipping close to 0.20 last week. The steep drop in correlations was responsible for less than half of the 186 basis-point decrease in the risk forecast of Axioma’s Japan short-horizon fundamental model, according to the decomposition of the change in risk from the standpoint of a full dense matrix. The rest was attributable to the decline in volatilities. Risk dropped globally over the past month, but the sharp decline in the previously highest-risk market—China—during this period made Japan’s 20.9% short-horizon risk as of last Thursday the highest among the regions Axioma tracks closely.

See graph from the Japan Equity Risk Monitor as of 7 February 2019:

 

 

 
 
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