Japan’s risk jumps as its market falls

Week of November 16

Japan’s stock market gave up some of its recent gains last week, falling sharply from the records hit during the first week of November. As stocks surged, FTSE Japan reached the highest level of trading volume year to date, exceeding $24 billion. All sectors in the index saw an increase in trading activity. As stocks fell, Japan’s risk jumped 140 basis points to 10.7%, as measured by the short-horizon fundamental Japan model, making Japan once again the riskiest among the regions Axioma tracks closely. The increase in risk was driven by the increase in both stock volatility and stock correlations. The surge in asset correlations was responsible for 67% of the short-horizon risk increase. The 20-day median pairwise asset correlation in the FTSE Japan more than doubled within one week, rising above 0.25 last Thursday.

Low volatility stocks strongly outperformed their higher volatility counterparts in Developed Europe, amid growing political turmoil in major European countries, notably Germany, the UK, and Spain. The Volatility style factor has recorded negative returns at the one-week, one-month, three-month, and six-month horizons in Developed Europe, as measured by Axioma’s medium-horizon fundamental Europe model. This was good news for all low volatility investors in the region. Particularly over the past month, the Volatility style factor turned strongly negative, reporting -2.2% cumulative returns—the highest one-month cumulative return in absolute terms among the style factors of the European model.

Major currencies fell against the US dollar, and are now pushing up against the low-ends of their six-month return ranges against the greenback last Thursday. Among developed currencies, the Japanese yen, Swiss franc, and New Zealand dollar were the biggest losers, recording negative six-month returns. The Turkish lira, Russian ruble, Colombian peso, Philippine peso, Mexican peso, and Taiwanese dollar were the losing emerging currencies. Currency volatility remained low, with most currencies (developed and emerging) ending last week near or at the low-ends of their six-month volatility ranges relative to the US dollar. The exceptions were the Canadian dollar, Chinese yuan, Indonesian rupiah, and Philippine dollar, which finished the week near the high-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.