Axioma Risk Monitor
Equity edition

China’s risk almost double that of US’s; Developed currencies still in the red, despite the US dollar fall; Australia keeps its optimism




China’s risk almost double that of US’s


Volatility in the US and China has followed opposite paths as the months-long tariff spat dragged into 2019. Risk in China’s market, as represented by the CSI 300, has climbed nearly 300 basis points this year, reaching a peak of 27% in the beginning of May, as measured by Axioma’s short-horizon fundamental China model. China’s short-horizon risk subsequently dropped abruptly, but jumped 30 basis points in the past five days, nearing 24.4% last Thursday. On the other hand, the Russell 1000’s volatility has fallen 670 basis points year to date, according to Axioma’s US short-horizon fundamental model, despite a small rise in risk in the past couple of months. The US’s risk remained flat (around 13.9%) last week, on news of renewed talks between the US and China.

The short-horizon fundamental risk of China was almost double that of the US’s last week, with a percentage difference of over 10%. The risk spread between the US and China has soared in 2019, after being at parity for a short time in the beginning of January. The spread even dipped below zero in the latter part of January, with the US’s risk surpassing that of China’s by 2 percentage points. We have not seen a negative US-China spread since 2012. However, the current level of the US and China risk spread is slightly above the 14-year median of 9%.

See graph from the China Equity Risk Monitor as of 20 June 2019:


Developed currencies still in the red, despite the US dollar fall


The US dollar lost ground against major developed currencies last week, following the Fed’s decision to hold interest rates steady, while signaling possible interest-rate cuts in the near future. However, most developed currencies still posted six-month losses against the greenback as of last Thursday. The exceptions were the Canadian dollar, Japanese yen, Norwegian krone, and Singapore dollar. Major developed currencies’ volatilities increased last week, with most being pushed away from the low-ends of their six-month volatility ranges against the greenback. The British pound ended the week as the riskiest developed market currency, with its volatility approaching 8%.

See graph from the Equity Risk Monitors as of 20 June 2019:



Australia keeps its optimism


High Volatility investors saw large gains in Australia over the past six-months, despite a dip in the return of the Volatility factor in the last month. The Volatility factor in Axioma’s Australia fundamental medium-horizon model recorded a negative return of -0.40% at the one-month horizon, but the style factor posted a six-month cumulative return of 5.6% by the end of last week. High Volatility investing was the second-best performing style factor investing strategy in Australia, after Momentum investing—which posted a six-month return of 8.6%. Australia was the only region among those Axioma tracks closely where Volatility recorded a positive six-month return. Low Volatility strategies outperformed, especially in China and Canada, where Volatility posted the biggest negative six-month returns, larger than -7%.

See graph from the Australia Equity Risk Monitor as of 20 June 2019:



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