Axioma Risk Monitor
Equity edition

Profitability tanks as Momentum soars in the US; Developed Market risk remains relatively flat; Little differentiation in EU country risk




Profitability tanks as Momentum soars in the US


Profitability—one of the worst-performing style factors in Axioma’s US All-Cap and US Small Cap medium-horizon fundamental models—posted negative returns at the one-week, one-, three- and six-month horizons in both models. The style factor’s cumulative six-month return dipped to -2.16% and -3.42%, in the US All-Cap and Small Cap models, respectively. Profitability’s return in the Small Cap model, was even lower than that of Volatility, which dominated most other markets. However, Profitability fared well in the other geographies Axioma tracks closely, particularly in Emerging Markets, where the factor’s six-month return reached +3%—the highest positive return among the style factors in Axioma’s Emerging Market medium-horizon fundamental model.

In contrast, after a miserable seven months, Medium-Term Momentum has seen a strong recovery over the past month, gaining more than 3% in both US All-cap and Small Cap, surely a relief to momentum-based investors.

See graph from the US Small Cap Equity Risk Monitor as of 30 May 2019:


Developed Market risk remains relatively flat


Developed market risk remained relatively flat at the medium horizon, despite worldwide markets being rattled by the US-China and US-Mexico trade disputes. Stocks in FTSE Developed climbed 16% in the first four months of 2019, followed by a 5% decline in the month of May. However, after a steep drop of more than 200 basis points in April, the risk of FTSE Developed rose only about 20 basis points in May, as measured by Axioma’s Worldwide medium-horizon fundamental model. The decrease in market risk was the major driver of the decline in total risk since April, as the decline in stock prices was more of a steady slide than a sudden drop. A closer look at the major components of risk revealed that a decline in country, currency and style risk boosted the overall decline. FTSE Developed Markets’ medium-horizon risk was 12.3% last Thursday.

See graphs from the Developed Markets Equity Risk Monitor as of 30 May 2019:



Little differentiation in EU country risk


For investors in Developed Europe, country risk is not a major source of differentiation. While stocks in Developed Europe fell this month—in line with the rest of the world—FTSE Developed Europe’s risk rose only slightly. This despite an abundance of unsettling events in Europe, including the European parliamentary elections, UK Brexit-related turmoil, rising unemployment in Germany and the conflict between the Italian government and the European Union over Italy’s debt management—to name a few. The short-horizon fundamental risk of FTSE Developed Europe remained flat last week and rose about 120 basis points over the past month, while its medium-horizon counterpart remained flat, as reported by Axioma’s Developed Europe fundamental model short- and medium-horizon variants. FTSE Developed Europe’s risk continues to be driven by the UK, whose contribution to the portfolio risk is now lower than its weight in the FTSE Developed Europe index.

Country risk for most developed European countries hovered around 5%, with most European countries being positioned at the low ends of their six-month volatility ranges. Note that this measure of risk is over-and-above that of the European market and other factors comprising the Developed Europe model, what we often call “extra-market” risk.

See graph from the Developed Europe Equity Risk Monitor as of 30 May 2019:



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