Equity Risk Monitor Insights

Week of June 8

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 noted that trading volume in the sector has lately been higher than its six-month average across geographies. Regionally, the sector’s volume has been roughly proportional to its index weight. In the US and Asia Pacific ex-Japan it remains the highest-volume sector, but the difference in current volume versus the six-month average also stands out, particularly in the US, where aggregate volume has fallen a bit, and is lower in every other sector except Consumer Discretionary. 

At the same time, 20-day correlations for FTSE Global Developed have been ratcheting down and then up for the past couple months, and ended last week near their six-month high. At the same time, 60-day correlations, while still low relative to historical levels, have drifted up from about 6% to just under 10% since February. The diversification ratio, which measures the impact of correlations on total risk, has essentially stalled out for the past several months, but remains much higher than it was six months ago. The diversification picture for the US is similar to Global Developed Markets, whereas Canada has seen a sharp decline in diversification. The UK, Europe and Japan, with diversification at lower levels than other markets, have experienced an increase since May. Australia, Asia Pacific ex-Japan and Emerging Markets, all with relatively higher levels of diversification than other markets, have continued to see steady increases even recently. Finally, China’s level of diversification is at the low end compared with other markets and dropped recently as average asset volatility rose, this despite steadily declining correlations. 

Lastly, risk for the FTSE 350 has declined steadily since the aftermath of the Brexit vote, albeit with a small blip in April when Theresa May called for a snap election (interestingly, it did not flinch when Article 50 was triggered at the end of March). Medium-horizon forecasts remained above their short-horizon counterparts, also suggesting there was no “election surprise” factor embedded in the markets. Volatility might increase based on the election results—note that the pound dropped sharply—but that is not a certainty, given the steady decline in risk after the surprise results in the US election.

If you’d like to get timely insights emailed directly to you, please sign up for our weekly newsletter.

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.