Axioma Risk Monitor
Equity edition

A more diversified Europe sees drop in risk; US rally reflected in Earnings Yield factor outperformance; Greece turns top performer




A more diversified Europe sees drop in risk


The fall in asset correlations continues to drive Developed Europe’s risk down, despite a slowdown in economic growth, the looming Brexit, political upheaval in several countries and the potential implementation of new tariffs by the US, to name a few. FTSE Developed Europe’s risk has dropped more than 500 basis points since February, as measured by Axioma’s Developed Europe short-horizon fundamental model. The decomposition of the change in risk from the standpoint of a full dense matrix revealed that the decrease in correlations accounted for over 60% of Developed Europe’s decline in short-horizon risk over the past three months. For more details, see blog post “Are European Stocks Really Less Volatile? Or Are Correlations Driving Volatility Lower?

The decrease in correlations suggests that benchmark and portfolio risk is currently more stock-specific. The Diversification Ratio—calculated as the weighted average of the total risk forecast for each stock in FTSE Developed Europe, divided by the total forecasted index risk, and measuring the impact of correlations—climbed in April, reaching a six-month peak last week, and indicating an increased ability for portfolio managers to adequately diversify their portfolios.

See graphs from the Developed Europe Equity Risk Monitor as of 2 May 2019:


US rally reflected in Earnings Yield factor outperformance


The Earnings Yield style factor posted high gains in the US for the past six months, lifted by renewed confidence in the US economy. The US market rallied throughout 2019, and was recently boosted by strong earnings reports, higher than expected US economic growth, renewed hopes in a US-China trade agreement, and the Fed’s decision last week to keep interest rates steady. Both small and large capitalization stocks participated in the rally, with the Russell 1000 and Russell 2000 indices recording year-to-date cumulative returns of more than 18%, with the Russell 2000 index slightly outpacing its larger cap counterpart.

The Earnings Yield factor in both of Axioma’s US medium-horizon fundamental models—US4 All Cap (US4) and US Small Cap (USSC4)—recorded strong positive returns at the six-month horizon, despite the five-day downturn following the earnings reports issued last week. Earnings Yield’s six-month return of 3.6% in the USSC4 model was tied with that of Size—the highest positive among their peers in the USSC4 model. Year to date the return is slightly above its long-term average. Earnings Yield recorded a more modest return in US4 (of 1.9%), but it was still the second-highest positive return (after Size) in the US4 model. In this universe, however, the return this year, while positive, is below the long-term average.

See graph from the US Small Cap (USSC4) Equity Risk Monitor as of 2 May 2019:



Greece turns top performer


Greece—one of the most unstable economies in the Eurozone—became the top performer among both developed and emerging markets, as the country entered a period of economic growth. Greece’s six-month return (denominated in US dollars) exceeded 15% last Thursday. While Greece, which was upgraded by Moody’s in March, is no longer in the lead risk-wise, it remains among the most volatile markets. Surprisingly, its nearly 15% volatility is only slightly higher than that of the US, as measured by Axioma’s short-horizon Worldwide fundamental model. Turkey, Luxemburg and Brazil emerged as the riskiest countries, with Singapore, Czech Republic and Chile being the least risky last week.

See graph from the Equity Risk Monitors as of 2 May 2019:



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Webinar | Axioma Insight™ Quarterly Multi-Asset Risk Review

Date: May 16, 2019
Time: 11:00 AM ET / 4:00 PM GMT

In this webinar, Christoph V. Schon, Axioma's Executive Director of Applied Research, examines how different scenarios affect the overall risk and diversification opportunities of a global multi-asset portfolio.

Register here.

Webinar Recording | Axioma Insight™ Q1 2019 Risk Review

In this webinar, Melissa R. Brown, Managing Director of Applied Research, discussed the major drivers of the change in risk during the first quarter and provided a comprehensive picture of the risk environment impacting investor portfolios.

Watch here.


On the Blog

Are European Stocks Really Less Volatile? Or Are Correlations Driving Volatility Lower?

Since the drivers of volatility (up or down) are always of interest, we decided to look a little deeper into the causes of this apparent apathy of the European market.

The pound’s down and FTSE’s up (again)… Are markets too complacent about Brexit?

With less than 4 weeks to go before the European Parliamentary Election markets appear to be surprisingly unfazed by the potential ramifications of that vote.

Is Investor Sentiment Subject to Seasonality?

While the subject of seasonality has been explored by a number of researchers, we decided to see if greater clarity could be obtained by looking at this phenomenon through the lens of a metric based on Axioma risk models.

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What, Exactly, Is a Factor?

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