Equity Risk Monitor Insights

Week of August 31

This week we noted that Japan’s equity market remained relatively calm following North Korea’s provocation last week. FTSE Japan, although down for the month, ended the week flat, while its risk continued to decline, as reflected by all four variants of Axioma’s Japan risk models: fundamental and statistical short- and medium-horizon models. For the first time in about two years, Japan’s short-horizon risk fell below that of Developed Europe, Asia Pacific ex-Japan, China, Australia, and Emerging Markets, as measured by Axioma’s local fundamental models.

Industry risk in the US rose sharply post-election and trended upward until February of this year when it finally started to retreat. It plateaued around 0.4% in May and June, but has been climbing since, exceeding February levels on Thursday, as measured by Axioma’s US medium-horizon fundamental model. However, industry risk remains below the 10-year median of about 0.8%, which was last surpassed in 2009. A number of US industries ended the week at the high-end of their six-month volatility ranges, namely: Air Freight, Electronic Equipment, Food Products, Food Staples, Health Care Technology, Insurance, Media, Road and Rail, Software, and Technology. Stock-specific risk rose slightly, while Style risk declined for the month. While both represent a small part of benchmark risk, they are likely to make up a larger portion of a portfolio’s active risk.

Lastly, the US Energy sector saw its risk decline steadily in August, even as Hurricane Harvey hit the Gulf Coast last week. Oil prices fell in the first part of the week, as refineries in the Gulf Coast region operated at lower capacity or shut down, thus curtailing their demand for crude. The oil price, however, bounced back on Thursday, and the Energy sector in the Russell 1000 ended the week flat. Energy was still the worst performing sector in the index, recording year-to-date cumulative returns of -15.8% last Thursday (whereas every other sector, except Telecommunications, is up year to date). Energy sector risk fell about one percentage point this month. This is a small decline for the riskiest sector in the index, whose forecasted risk of 19.4% last Thursday was 4.4 percentage points higher than that of the second riskiest sector in Russell 1000—Telecommunications. Surprisingly, Energy’s contribution to benchmark risk has remained below its weight since June, a pattern we had not seen since October 2014.

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Melissa Brown, CFA

As Managing Director of Applied Research, Melissa Brown generates unique insights into risk trends by consolidating and analyzing the vast amount of data on market and portfolio risk maintained by Axioma. Brown’s perspectives help both clients and prospects to better understand and adapt to the constantly changing risk environment.