Equity Risk Monitor Insights

Week of May 25

As the head of the Applied Research team, I am charged with providing insights into the current state of market risk and how it might be impacting investors’ portfolios. Once a week, we publish a summary of the highlights from the prior week, using Axioma’s risk models and analytic tools to transform data into information. 

This week we have noted that China’s stock market remained relatively calm following the downgrading of the country’s sovereign credit rating by Moody’s Investors Service on Wednesday. In fact, the market rose over the past week. Risk forecasts for the CSI 300 ticked up only slightly for the four variants of Axioma’s China Model (statistical and fundamental at short- and medium-horizons) last week. The short-horizon fundamental model reflected risk increases of 30 and 75 basis points over the past week and month, respectively. Risk forecasts have been flat for the past three months, and they decreased 115 basis points in the last six-months. The “Risk Watch” chart showed China’s market returns as having remained within one standard deviation of the expectation at the beginning of the prior month, three months and six months, exceeding expectations for the prior week.

At the same time, the heavily controlled Chinese currency was little impacted by the downgrade. As the People’s Bank of China focuses its efforts on the yuan’s stability against the US dollar, the Chinese currency was the least volatile currency against the greenback among major emerging and developed currencies as of last Thursday.

We also noted that at the individual country level, the latest chart of global correlation hotspots revealed sharp increases in correlations in Spain, Portugal, Switzerland, Belgium, Netherlands, Sweden, Finland, Saudi Arabia, India, Thailand, Brazil and the US. Axioma’s Worldwide short-horizon fundamental model showed correlations increased by more than two percentage points in these countries last week. In contrast, both Slovenia and Venezuela showed a decrease of two percentage points over the same period. At the same time, volatility rose more than one percentage point over last week in some of these counties where correlations shot up: Switzerland, Finland, Saudi Arabia, India, Thailand and Brazil.

Lastly, dispersion—the cross-sectional standard deviation of weekly returns—decreased steadily in the US over the past four weeks. The narrower the dispersion, the less the opportunity for active managers to add value in this region. At the same time, winning stocks in the Russell 1000 greatly exceeded losers in the index last week.

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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.