Equity Risk Monitor Insights

Week of July 6

Firstly, we noted that global trading activity has been on the rise since the beginning of the year, while correlations have remained below long-term averages. In the latest week, trading volumes surpassed USD210 billion, nearing peaks last seen immediately after the November US elections. The 60-day median pairwise asset correlation in the FTSE Developed index has risen sluggishly to date in 2017, staying within the 0.06 to 0.10 range and well below the 0.13 long-term average. In contrast, 20-day asset correlations have oscillated widely this year, but they, too, have stayed below the long-term average. June saw the latest spike in 20-day asset correlations, when the median rose to 14%, but since then it halved.

We also realized that small-cap stocks were the big winners in Japan, in stark contrast to other regions in the world. Size recorded -1%, -2%, -3%, and -4% returns at the one-week, one-month, three-month, and six-month horizons, respectively. In absolute terms, for each period, these were the highest values among the other style factors in Axioma’s fundamental Japan model. Canada, Australia, and Developed Europe were the only other regions where small caps fared better than large caps. In contrast, large caps outperformed strongly in the US, Asia-Pacific ex-Japan, China, and Emerging Markets, particularly at the six-month horizon. The Size factor return was relatively flat for overall Developed Markets.

However, style risk sunk in China, with equity market risk falling to decade-lows last week, as measured by the medium-horizon forecast of Axioma’s China Model. When looking at the major components of risk, industry risk was the main driver of the fall in total risk. Style and stock specific risks, which are only a small part of the benchmark risk, followed different paths. Style risk fell abruptly recently—about 45% in the last couple of weeks—while stock-specific risk continued on the upward trend started in May.

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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.