Equity Monitor Insights

Emerging markets’ strength relative to developed reverses course. Emerging markets took a bit of a tumble last week, while most other major markets strengthened. A far higher proportion of EM stocks fell, and short-term correlations increased as well. While both medium-horizon and short-horizon fundamental risk forecasts remained fairly stable, the short-horizon statistical forecast noticeably jumped. While the increase in the statistical forecast may suggest a new, transient risk not accounted for in the fundamental models, it also remains quite low relative to where it has been historically.

Most European countries have seen sharply lower volatility and correlations. Charts of volatility and correlation hotspots are littered with downward-facing green arrows for European countries, meaning there were big drops in both over the last week. The decreases accompanied strong returns in many European countries, and sharp declines in top-line risk for the FTSE Developed Europe benchmark from all four model variants, but especially for the short-horizon statistical model. The median pairwise 20-day correlation of stocks within the index also plunged, to less than 15% from almost 40% earlier this month.

South Korean, KRW risks remain relatively low. Despite increasing tensions on the Korean peninsula, extra-market risk for the Republic of Korea and for the Korean won remain low relative to many of their “peers”, as well as near the bottom (KRW) and middle (Korean equities) of their six-month ranges. The Kospi index closed the week at about the same level of three months ago, and is actually up since the beginning of September. Investors clearly do not seem overly worried about the prospect of war.

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Melissa R. 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.