Axioma Risk Monitor
Equity edition

Lower asset correlations drive diversification ratio higher; Most major Emerging Market currencies now at or near the low ends of recent risk levels; Momentum continues to recover, while soaring in Australia




Lower asset correlations drive diversification ratio higher


The Diversification Ratio—the ratio of the weighted average total risk of stocks in a benchmark to the benchmark’s total risk—is a measure of the impact of asset-asset correlations on the ability of a manager to effectively diversify a portfolio. Lower correlation means higher diversification, and over the past six months we have seen a sharp increase in the ratio across all of the markets we track closely, with the exception of the UK and China. In those countries, continuing Brexit woes and trade wars, respectively, are impacting individual company fundamentals as drivers of asset returns, thereby keeping correlations from falling as they have in other regions. In most regions, including the UK, the ratio has also climbed sharply over the past few weeks.

See the following charts from the 18 July, 2019 FTSE Developed risk monitor:


Most major Emerging Market currencies now at or near the low ends of recent risk levels


Despite increasing economic uncertainties (we seem to say that a lot), risk for most major emerging market currencies is now near six-month lows relative to the US dollar. Even the Turkish lira, which has by far the highest risk of the major currencies, is at the lowest level of risk it has seen in at least six months. In addition, six-month returns for many currencies are at the high ends of their ranges, with the Egyptian pound standing out, albeit at the high end of a small risk range. The recent decrease in risk may have surprised some investors, who nonetheless should continue to be vigilant about their expected reward for taking on currency risk.

See the following chart from the 18 July, 2019 Emerging Markets Risk Monitor:



Momentum continues to recover, while soaring in Australia


Medium-Term Momentum had a tough go earlier this year, but recent returns have pulled it into the black in most regions. Excluding Japan, where the return was negative, over the past six months the factor’s return has ranged from 1.6% in Axioma’s European model to more than 9% in Australia, no doubt a relief to many investors who tilt on Momentum. One-month returns have also been positive, ranging from just 0.03% in Europe to 1.25% in US Small Cap (again excluding Japan where the factor’s return was -1.2%). Much more detail appears in our second-quarter Axioma Insight report (download here). A point worth noting is that in the US and the WW4 models Momentum seemed to fare better on the short side, meaning the high returns stated here may not have been achievable to many long-only investors.

See the following charts from the 18 July, 2019 Australia Risk Monitor:



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Webinar Replay | Axioma Insight™ Q2 2019 Risk Review

In this webinar Melissa Brown, Managing Director of Applied Research, provided illuminating insights into key drivers of risk and the resulting implications for portfolio managers, risk managers, investment strategists and all those wrestling with the uncertainties facing today’s markets.

Watch the recording here.

Webinar | Axioma Insight™ Q2 2019 Risk Review APAC

Date: August 8, 2019
Time: 10:00 AM HKT / 11:00 AM JST

In this webinar, Olivier d’Assier will identify the key drivers of market risk in the previous quarter, draw some conclusions as to the nature of risk currently, and make present insight as to which sources of risk will be most influential in the current quarter.

Register here.


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Axioma Risk Monitor

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Note: The recent decision by FTSE to add China A Stock Connect stocks to its indices had little effect on their risk, since the A shares were added initially with a small (25%) weight. However, the addition of so many names has had an impact on the average daily trading volume which accounts for the new names at full weight. That is the source of the huge jump in chart 25 in some of the risk monitors.

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