Axioma Risk Monitor
AXIOMA RISK MONITOR
Equity edition

European Financials suffers steep losses; US asset diversification remains low; Turkish lira back in the spotlight

 

HIGHLIGHTS FOR THE WEEK ENDED MARCH 28

 
 
 

European Financials suffers steep losses

 

Financial shares in Europe have been driven down by negative interest rates, Brexit-related anxieties, concerns of a global economic slowdown, and the European Central Bank’s policy reversal three weeks ago, resulting in the introduction of new stimulus. The Fed’s postponing of interest-rate increases also drove down European Financials, which became the worst performer among the 11 sectors in the FTSE Developed Europe index. Although Financials still posted a cumulative year-to-date return of 8% as of last Thursday, it recorded an active return of -4% against FTSE Developed Europe. The risk of the sector ticked up about 10 basis points, even as the overall benchmark risk continued to slide last week. Financials has the highest weight (19%) in the FTSE Developed Europe, and its contribution to the benchmark risk exceeded its weight by almost 100 basis points. This suggests that a bet on that sector could introduce more active risk than expected.

US financial stocks were also pulled down by the Fed’s decision, and despite the rebound over the past week, they were the second biggest loser after Health Care in the Russell 1000. US Financials has recorded a year-to-date cumulative return of 9%, slightly higher than European Financials. But US Financials’ contribution to the risk of the Russell 1000 was slightly lower than its weight of 12%.

See graph from the Developed Europe Equity Risk Monitor as of 28 March 2019:



 

US asset diversification remains low

 

As investors try to decide if the recent market sell-off is the start of a recession or only a bump in this year’s rally, US portfolio managers face a reduced ability to diversify their portfolios than they had last year, as we can see in the low level of the diversification ratio of the Russell 1000, which is now nearing historically low levels. The asset diversification ratio is calculated as the weighted average of the total risk forecast for each stock in the Russell 1000, divided by the total forecasted index risk, and measures the impact of correlations—which started to climb in March—on total risk. After reaching a near-term high of close to 5.0 at September-end of last year, the ratio dropped abruptly in the fourth quarter of 2018, and has been hovering around 2.5 this year, as measured by Axioma’s US4 fundamental medium-horizon fundamental model. The highest level of this ratio in the Russell 1000 over the past 22 years (close to 9) was seen at the end of 2017. Asset diversification remained low in all other regions Axioma covers closely, except in Emerging Markets.

See graph from the US Equity Risk Monitor as of 28 March 2019:

 

 

Turkish lira back in the spotlight

 

The Turkish lira plunged again ahead of local elections, despite Turkish government efforts to support the currency. After the Turkish currency crisis last summer, the lira recovered, propped by a sharp increase in interest rates by the Turkish central bank in September. Even with the recent loss of ground, the lira recorded the best performance against the greenback among both major emerging and developed currencies over the past six months, with a six-month return of close to 23% last week. At the same time, although positioned near the low-end of its six-month volatility range against the US dollar, the lira remains the riskiest currency, with a volatility of 23%.

See graph from the Emerging Market Equity Risk Monitor as of 28 March 2019:


 

 

 
 
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