Axioma Risk Monitor
Equity edition

Global markets—developed and emerging—converge in low volatility environment
US market remains key driver of global risk
China sees risk-premia dispersion on anemic volume




Global markets converge on low volatility


The global market risk and return space has shrunk to almost a single point for developed markets, and an inverted truncated curve for emerging markets (except for Turkey). Almost nothing separates global markets in terms of risk or return over the last six months. For emerging markets, risk hasn’t paid off, with riskier ones being rewarded with negative returns.

The main driver of low volatility is a fall in factor volatility, followed by very low levels of stock pairwise correlation across all markets, although the latter has rebounded of late. Low factor volatility has translated to comparably low returns for risk premia strategies. In contrast, weekly asset dispersion levels remain high, which should benefit high conviction stock-picking portfolios.

See graph from the Equity Risk Monitors as of 28 November 2019:


US market remains key driver of risk in global (developed) market portfolios


In a global developed markets portfolio, the US contribution to risk remains higher than its index weight would suggest—a result of both the US-China trade war being the biggest influencer of investor sentiment, and the Fed’s monetary policy being at the epicenter of global QE efforts.

Amid expectations that the trade dispute will be (somewhat) resolved soon, investors have returned to a risk-on investing style. Cyclical sectors are once again getting the lion’s share of the volume, thus contributing more to benchmark risk than their weight would suggest, and traditional safe havens, such as the Japanese yen, Gold, and the Swiss franc, declined this week. In contrast, the US dollar, Oil, the Russell 2000, and the FTSE Emerging Market index have all seen gains. The only contrarian indicator this past week was in the bond market, where US 10-Year Treasury yields declined.

See graph from the Global Developed Markets Equity Risk Monitor as of 28 November 2019:



China sees risk-premia dispersion on anemic volume


Style-factor dispersion in China continues to rise, favoring systematic investors. Profitability and Size continue to outperform, and Value has strongly rebounded, as in other markets. One thing to note is that this is occurring in very low volumes, given that domestic investors continue to face negative macro data, as they await a resolution to the US-China trade war and further stimulus form the Bank of China.

China is also (by far) the riskiest component of the FTSE Asia ex-Japan index (see Figure 20 in the Asia Pacific ex-Japan equity monitor), followed by the two most economically damaged countries in the region (South Korea and Hong Kong). So, while volatility in China has been declining for six months now, volumes indicate this is due more to a lack of investors than a consensus on the lack of risk in that market.

See graphs from the China Equity Risk Monitor as of 28 November 2019:



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