Axioma Risk Monitor
Equity edition

US asset correlations tank
Momentum falls Down Under but takes off in Canada
US healthcare stocks among the winners



US asset correlations tank


Asset correlations in the US tanked in recent weeks, providing fertile ground for equity investors. US indices climbed to fresh records, as their risk plunged recently, driven by falling correlations. The median pairwise realized 20-day asset correlation in both the Russell 1000 and Russell 2000 dipped below 0.10, touching year-to-date lows in both cases. The 60-day median asset correlation also reached year-to-day lows for both indices. This low correlation environment should provide active managers with more opportunities to add value to their investing processes, since stocks are being driven by their own characteristics rather than macroeconomic events, which tend to push stocks in the same direction.

Lower stock correlations have been the main contributor to the declines in risk in both the Russell 1000 and Russell 2000, as measured by the short-horizon fundamental US All Cap and US Small Cap models, respectively. The decomposition of the change in risk from a stock-level perspective revealed that more than 70% of the decline in the Russell 1000 risk and more than 90% of the decrease in the Russell 2000 risk, over the past six months, was attributable to the fall in stock correlations.

See graphs from the US Small Cap and Large Cap Equity Risk Monitors as of 21 November 2019:


Momentum falls Down Under but takes off in Canada


Momentum fell substantially in Australia, while it rose by almost the same amount in Canada, over the past month. Momentum has followed an upward trend in Australia for most of the year. Even the September drop in Momentum was of a much lower magnitude in Australia, compared with other regions. By the end of the third quarter, Momentum’s year-to-date return in Australia (11.6%) was the largest among all regions Axioma models track closely. However, over the past month, Australia’s Momentum saw a steep fall (close to 2%). Momentum’s year-to-date return in Australia dropped to 8.5% as of last Thursday, as reported by Axioma’s medium-term fundamental Australia model.

In contrast, Momentum in Canada recorded a one-month return of close to 2%. As of last Thursday, Canada’s Momentum saw a year-to date return of nearly 8.3%, as measured by Axioma’s Canada medium-horizon fundamental model. Momentum in Canada, therefore, remained the second-best performer, still lagging slightly behind Australia’s Momentum year-to-date return.

See graph from the Australia Equity Risk Monitor as of 21 November 2019:

See graph from the Canada Equity Risk Monitor as of 21 November 2019:



US healthcare stocks among the winners


Healthcare stocks in the US are among the big winners, following the Trump administration’s release of a healthcare cost transparency rule on November 15. The Health Care sector in the Russell 1000 posted a quarter-to-date return of 9%, surpassing even that of Info Tech sector’s return (8%) over the same period. Most sectors in the US index are up so far this quarter, although Consumer Discretionary and Consumer Staples are flat, and Real Estate and Utilities have posted quarter-to-date losses.

All US sectors saw declines in risk from September end. The Health Care sector’s risk of 14.6% positioned it as the fourth least risky among the 11 sectors in the Russell 1000, as recorded by Axioma’s medium-horizon US4 fundamental model. Health Care is the second largest sector in the Russell 1000, but its contribution to benchmark risk was lower than its weight last week, which made Financials the second-largest contributor to the Russell 1000 risk, after Info Tech.

See graph from the US Equity Risk Monitor as of 21 November 2019:



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