Axioma Risk Monitor
Equity edition

US small-cap risk drops amid quiet trading; Risk spreads raise red flag in Canada; Asset diversification keeps climbing in China




US small-cap risk drops amid quiet trading


The volatility of the small capitalization stocks in the US saw a steeper drop than that of their larger counterparts last week, as the Fed lowered interest rates for the third time this year. The risk of the Russell 2000 fell 90 basis points over the past five days, while that of the Russell 1000 dropped about 60 basis points, as measured by Axioma’s US Small Cap and All Cap short-horizon fundamental models, respectively. The Russell 2000 saw a total drop of 190 basis points over the past month—more than double that of the Russell 1000 for the same period. Small Caps’ risk of 15.7% was only 2 percentage points higher than that of large caps as of last Thursday.

Nonetheless, the trading volume of the Russell 2000 remained below 24 billion, and close to the six-month low reached the prior week. Trading activity in the Russell 1000 rose somewhat, but also remained low when compared with prior levels.

See graphs from the US Small Cap Equity Risk Monitor as of 31 October 2019:


Risk spreads raise red flag in Canada


Canada remained the least volatile developed country, but risk spreads are raising a red flag. Markets around the world saw their volatilities continue to fall last week, and Canada was no exception. The TSX Composite’s volatility fell about 80 basis points over the past week, as measured by the short-horizon fundamental variant of Axioma’s Canada model (CA4). Canada’s short-horizon fundamental risk of 7.8% was 3.5 percentage points lower than that of FTSE Developed—the second least-risky benchmark.

However, the spread between the short-horizon statistical and fundamental forecasts for the TSX Composite has widened since August, nearing 2% last week. Canada has not seen this level of spread since the beginning of 2018. Positive risk spreads can indicate extra risk picked up by the statistical models, which may reflect potential changes in the risk regime and/or the emergence of non-traditional factor risk sources.

See graph from the Canada Equity Risk Monitor as of 31 October 2019:



Asset diversification keeps climbing in China


Asset diversification in China has been climbing since August, as the US-China trade dispute continues. 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 correlations in China drove the higher diversification. Both the 20- and 60-day median realized correlations of the assets in China’s CSI 300 index dropped to six-month lows, while the ratio climbed above 3.5, as reflected by Axioma’s medium-horizon fundamental China model.

See graph from the China Equity Risk Monitor as of 31 October 2019:



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