Equity Risk Monitor Insights

Week of June 29

Firstly, we noted that one year after the Brexit vote, risk of the UK market has more than fully retreated from the peak reached in July of last year, dipping well below pre-referendum levels of 2016. In April 2017, the short-horizon fundamental forecast of Axioma’s UK model declined to 8.7%, a level not seen since 2005. Following the announcement of the UK snap elections, the forecast ticked up and ended at 8.9% on the one-year anniversary last Friday. The risk forecast of the fundamental medium-horizon model variant was substantially higher than its shorter-term counterpart on the same date at 11.9%. The lack of convergence of medium- and short-horizon fundamental forecasts was driven by the much slower rate of decline in industry and style risks at the medium horizon. The largest drops since the July 2016 peaks were seen in the statistical models’ forecasts, where risk declined by 19 and 15 percentage points at the short and medium horizons, dipping to 8.7% and 8.9%, respectively, on June 23, 2017. Throughout 2017, the statistical model forecasts at both horizons remained below those of the fundamental models, alleviating concerns of potential additional sources of risk for the UK market, such as changes in the risk regime and/or the emergence of non-traditional factor risk sources.

Although the US equity market has rallied since the beginning of the year, high beta stocks fared poorly. The Market Sensitivity style factor in Axioma’s US4 fundamental model recorded strong negative cumulative six-month returns of -2.6%, indicating that high beta stocks significantly underperformed during this period. This negative return was surpassed only by the Volatility style factor at -3.4%—low volatility stocks were the big winners during this time. Nonetheless, Market Sensitivity’s luck changed in June, with positive monthly returns of 1.8% and weekly returns of 0.7%. The UK and Japan exhibited a similar pattern, albeit their negative six-month returns were of a lower magnitude. In contrast, returns to Market Sensitivity at the six-month horizon were slightly positive in Australia and flat in Canada.

We also realized that the euro, British pound, and Canadian dollar appreciated against the US dollar as their central banks suggested a reduction in monetary stimulus at a forum in Sintra, Portugal last week. The remarks from the European Central Bank, Bank of England and Bank of Canada sent the three currencies to the high ends of their six-month return ranges against the greenback. The pound saw the largest jump, moving in one week from the middle of its return range to the top. Interestingly, risk remained low, with the three currencies situated near or at the low ends of their volatility ranges.

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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.