Axioma Risk Monitor
AXIOMA RISK MONITOR
Equity edition

Markets buffeted by twin headwinds of rising volatility and asset correlation; US equities remain the epicenter of risk for global portfolios; As worries about the global economy increase, cyclical sectors and IT in particular become the main sources of risk

 

HIGHLIGHTS FOR THE WEEK ENDED AUGUST 23

 
 
 

Markets buffeted by twin headwinds of rising volatility and asset correlation

 

After declining for all of July, both market volatility and pairwise asset-asset correlation surged since the start of August. Asset correlation in particular reached new highs last week in all the markets Axioma tracks (see figure 7 in all of the Axioma Risk Monitors). This is a double negative for investors who experienced a large jump in their active risk levels from the loss of diversification benefits. With asset correlation this high, risk-reduction cannot be obtained by simply holding more assets in the portfolio. Instead, investors should focus on designing factor hedges by using the factor covariance matrix to reduce factor risk.

See graph from the Emerging Markets Equity Risk Monitor as of 23rd of August 2019:



 

US equities remain the epicenter of risk for global portfolios

 

The US’ contribution to the risk of the FTSE World Developed index remains higher than its weight in the index would suggest. Last week’s escalating trade war with China, the disappointing meeting of central bankers, and the expected acrimonious G-7 meeting in France this weekend is forcing investors to rethink their bet on the US market as a safe haven. Having handsomely outperformed other markets for some time now, the US market is the place with the most profit taking to be had. The increase in both volatility and correlation seen in the US market since the start of the month was also accompanied by a resurgence of trading volume, as investors respond to rising uncertainty by voting with their feet. No other constituent market of the global index contributed more to risk than their weight..

See figure 20 from the Equity Risk Monitors as of 23rd of August 2019:

 

 

As worries about the global economy increase, cyclical sectors and IT in particular become the main sources of risk

 

The Tech, Consumer Discretionary, Industrials, and Energy sectors all contribute more to the overall risk of the FTSE World Developed index than their weight would suggest. The tech sector in particular is being hit by worries about global growth, the US-China trade war, and the Japan-South Korea dispute, which is seen as potentially disruptive to the sector’s global supply chain if it escalates.

See graph from the Equity Risk Monitors as of 23rd August 2019:


 

 

 
 
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Events

Webinar | Axioma Insight™ Q2 2019 Multi-Asset Risk Review

Date: August 28, 2019
Time: 11:00 AM (ET) / 4:00 PM (BST)

The constant change in market focus over the past months has led to a sharp decrease in cross-asset class correlations. Join Christoph V. Schon, Axioma's Executive Director of Applied Research, in this webinar to learn more about how these different environments have affected the overall risk of multi-asset class portfolios.

Register here.


Axioma Financial Intelligence Summit: London 2019

Date: October 30, 2019

Join us in London for a full day of expert presenters, illuminating presentations and thought-provoking discussion.

Register here.


Axioma Financial Intelligence Summit: New York 2019

Date: November 20, 2019

Join us in New York for a full day of expert presenters, illuminating presentations and thought-provoking discussion.

Register here.


 

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Axioma Risk Monitor

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The Axioma Risk Monitor reports use Axioma’s solutions to bring you insights on trends in market and portfolio risk. You can subscribe to both the multi-asset class and equity edition here.

 
 
 
 

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