Axioma Risk Monitor
AXIOMA RISK MONITOR
Equity edition

Style factor reversal halts; Markets unfazed by OECD’s forecasted economic slowdown; Japanese large caps stage a comeback

 

HIGHLIGHTS FOR THE WEEK ENDED SEPTEMBER 19

 
 
 

Style factor reversal halts

 

The sharp factor reversal out of Momentum and into Value came to a stop last week, as investor sentiment improved following positive US economic data, the Fed’s rate cut, and as the US-China trade dispute eased. Momentum ended the week as a winner, while Value was a loser, in nearly all geographies last week—a familiar pattern for these style factors for most of 2019. The five-day return for Momentum was positive in all regions Axioma tracks closely, except Canada. For Value, only Canada, Japan, China, and Developed Europe still recorded small positive one-week returns. The magnitude of the factor returns is also back to normal, but the factor volatilities remained elevated after the massive moves of the prior week pushed them to year-to-date peaks. For more insights on the current factor volatility levels and how they compare historically, see our blog post, Factor Reversal Halts, but Volatility Remains Elevated.

See graph from the Developed Markets Equity Risk Monitor as of 19 September 2019:



 

Markets unfazed by OECD’s forecasted economic slowdown

 

A predicted global economic slowdown in 2020—forecasted by the Organization for Economic Cooperation and Development (OECD) last Thursday—had little impact (not surprisingly) on equity markets. Among the reasons cited by the OECD for the cut in its growth forecast were the all-too-familiar US-China and Japan-Korea trade disputes and the possibility of a hard-Brexit. Most benchmarks continued to post gains as their risk fell last week, including in the US, Japan, Developed Europe and the UK, as measured by Axioma’s short-horizon fundamental local models. China’s risk remained flat. Canada was the only exception, where risk rose 23 basis points. Still, Canada remained the least volatile among the regions Axioma tracks closely.

See graph from the Developed Markets Equity Risk Monitor as of 19 September 2019:


 

 

Japanese large caps stage a comeback

 

Large capitalization stocks in Japan had a strong run over the past month and continued to rise as the US and Japan moved ahead with a trade deal on Monday. After tumbling in July, the Size factor reported a one-month return of 3.59% last Thursday, as measured by Axioma’s Japan medium-horizon fundamental model. Size became one of the best performing style factors in the Japan model over the past week, month, three months and six months. That is, Japanese large-cap stocks greatly outperformed small caps over these horizons. Size in Japan reported the highest positive six-month return (of 3.11%) among its peers in the model.

See graph from the Japan Equity Risk Monitor as of 19 September 2019:


 

 

 
 
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On the Blog

Factor Reversal Halts, but Volatility Remains Elevated

While last week’s sharp reversal of factor returns has halted, higher levels of factor volatility persist.

The Fed’s ‘insurance’ cut? Not cutting it…

The 25-basis point downward move in the Federal Funds Rate target range at the end of July was meant to be an ‘insurance’ cut to support the US economy.


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