Axioma Risk Monitor
Equity edition

Volatilities and correlations soar worldwide; Emerging Markets’ risk catches up with the US; Hong Kong’s volatility reaches a three-year peak




Volatilities and correlations soar worldwide


Stocks rallied across continents, while volatilities and correlations shot up last week, as the prospect of fresh negotiations between the world’s two largest economies in October brought hopes for a truce between the US and China. The latest charts of global volatility and correlation hotspots were invaded by upward arrows, reflecting sharp increases in volatility and correlations at the individual country level.

Axioma’s Worldwide short-horizon fundamental model showed that volatility rose more than one percentage point, while correlations increased by more than two percentage points last week in the majority of countries worldwide. The widespread increase in both components of risk suggests that managers need to take a particularly close look at the active risk of their portfolios, with a focus on the sources of the largest changes.

See graph from the Equity Risk Monitors as of 5 September 2019:


Emerging Markets’ risk catches up with the US


The short-horizon risk of Emerging Markets caught up with that of the US last week, as reported by the short-horizon fundamental variants of Axioma’s US and Emerging Markets models. Historically, the risk of FTSE Emerging Markets has always been higher than that of the Russell 1000, with a few short-lived exceptions. However, the US risk exceeded that of Emerging Markets for most of 2019, with only a few exceptions in May and July.

The risk of FTSE Emerging shot up 156 basis points in the past five days, reaching 15.5% last Thursday, while that of the US remained flat for the week. Emerging Markets’ risk is now 16 basis points higher than that of the US. Emerging Markets and the US were the second riskiest among all geographies Axioma tracks closely, after China, which reported a volatility of 18%.

See graph from the Emerging Markets Equity Risk Monitor as of 5 September 2019:



Hong Kong’s volatility reaches a three-year peak


Ongoing political turmoil is weighing heavily on the Hong Kong market, which has suffered large losses and is now one of the riskiest markets among both developed and emerging markets. The withdrawal of the extradition bill last week brought some hope to the Hong Kong market, which advanced for the week. Despite the withdrawal, protests continued as demands expanded beyond the issue that initially sparked them.

Hong Kong started the year as one of the least volatile countries, but as protests intensified its risk climbed more than 7 percentage points from its year-to-date low of 10% at the beginning of May. As of last Thursday, Hong Kong was the riskiest among developed countries, as measured by Axioma’s Worldwide short-horizon fundamental model. Not only was Hong Kong the riskiest, but it was also the worst performer among developed countries over the past six months, with losses exceeding 10% (denominated in US dollars). At 17.5% volatility, Hong Kong’s risk was only behind that of Greece and South Korea. Hong Kong hasn’t seen this level of volatility since 2016.

See graph from the Equity Risk Monitors as of 5 September 2019:



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The constant change in market focus over the past months has led to a sharp decrease in cross-asset class correlations. Watch this webinar to learn more about how these different environments have affected the overall risk of multi-asset class portfolios.

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