Axioma Risk Monitor
Equity edition

Large-cap stocks outperform worldwide; Style risk drops for Russell 2000; Ireland becomes the riskiest developed country




Large-cap stocks outperform worldwide


Large-capitalization stocks strongly outperformed their small-cap counterparts in most regions Axioma models track closely, as markets continued to rally around the globe. Stocks were lifted by both the prospect of a truce between China and the US, and a relatively good earnings season so far. Size reported the largest positive six-month return among style factors in each of the following Axioma medium-horizon fundamental models: UK, Developed Europe, Asia Pacific ex-Japan, Emerging Markets and Developed Markets. The UK stood out with a six-month cumulative return of 6%. Canada and Australia were the exceptions, posting negative six-month returns of -0.65% and -0.50%, respectively.

See graph from the Developed Markets Equity Risk Monitor as of 7 November 2019:


Style risk drops for Russell 2000


Style risk for the Russell 2000 has dropped from the six-month peak reached in September. That said, many factors—Market Sensitivity, Value, and Profitability, to name a few—remain near the high-ends of their six-month volatility ranges. Market risk has been the main driver of the steep decline in the total risk of the Russell 2000 over the past couple of months, while style risk boosted the fall.

The Russell 2000 saw a decline in risk of 170 basis points since the 18.2% September high, as measured by the Axioma Small Cap medium-horizon fundamental model. Industry risk declined slightly, while stock-specific risk (which is only a small part of total benchmark risk) was relatively flat over the same period. Investors who make bets on US small-cap stocks, having the Russell 2000 as their benchmark, could see a shift in tracking error and may want or need to make portfolio changes. In particular, those using style factors could see a very different bottom line from those who make industry bets.

See graph from the US Small Cap Equity Risk Monitor as of 7 November 2019:



Ireland becomes the riskiest developed country


Irish stocks rose as the prospect of a no-deal Brexit became less likely, but so did the risk of the Irish market. Ireland posted a positive six-month return of nearly 9%, denominated in US dollars, last Thursday. Spillover effects of Brexit have now made Ireland the riskiest among developed countries, as measured by Axioma’s Worldwide short-horizon fundamental model. The relative increased riskiness of Ireland may mean portfolio volatility has been driven higher (or lower for portfolios holding an underweight position of Irish stocks).

See graph from the Equity Risk Monitors as of 7 November 2019:



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In this webinar, the Applied Research team broke down the drivers of volatility, style factor returns and their portfolio implications, and other topics that will help investors better understand the risk environment that drove their portfolio returns.

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