Axioma Risk Monitor
Equity edition

Small-cap and illiquid stocks thrive in Emerging Markets; Mexican peso depreciates amid tariff threats; Japan’s market slips into negative territory




Small-cap and illiquid stocks thrive in Emerging Markets


While Emerging Markets fell sharply in May, along with their Developed counterparts, emerging stocks saw small-cap and less liquid stocks outperform. The Size and Liquidity factors in Axioma’s Emerging Markets medium-horizon fundamental models recorded negative one-, three- and six-month returns. Size and Liquidity posted the highest negative six-month returns in the Emerging Markets model, of -4.60% and -2.01%, respectively. This should not necessarily come as a surprise. When investors feel the need to sell quickly, they often focus on the larger and more liquid stocks, so their counterparts end up turning in better relative performance. In contrast, Size saw positive six-month returns in most other regions Axioma follows closely, most notably in the US where the style factor recorded the second-highest positive six-month return (after Medium-Term Momentum) among style factors in Axioma’s US medium-horizon fundamental model.

See graph from the Emerging Markets Equity Risk Monitor as of 6 June 2019:


Mexican peso depreciates amid tariff threats


The Mexican peso depreciated against the US dollar, as Mexico was downgraded by two rating agencies and the US president threatened to impose tariffs on imports from Mexico. Despite the peso’s fall last week, the Mexican currency still had among the highest six-month returns against the greenback, among developed and emerging currencies (above 5%). The peso’s volatility of close to 10% placed it among the riskiest emerging currencies, but still closer to the low end of its six-month volatility range, and still far behind the riskiest currency—the Turkish lira (22%).

See graph from the Equity Risk Monitors as of 6 June 2019:



Japan’s market slips into negative territory


The Japanese stock market took a hit amid concerns related to escalating trade tensions between the US, China and Mexico, and an overall slowdown in the global economy. Japan is the worst performer amid major emerging and developed countries, recording a six-month return of around -5%, denominated in USD as of last Thursday. Japan was also among the riskiest countries, with its volatility of almost 16% only slightly behind that of China’s, as measured by Axioma’s Worldwide short-horizon fundamental model.

However, when looking at risk from a local currency prospective, Japan’s short-horizon risk of 14.3% was 10 percentage points lower than that of China’s, as revealed by Axioma’s Japan and China short-horizon fundamental models, respectively.

See graph from the Equity Risk Monitors as of 6 June 2019:



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