Equity Risk Monitor Insights

Week of June 22

Firstly, we noted that large capitalization stocks in China have had a fantastic run so far this year, punctuated last week by MSCI’s decision to include China’s A-share stocks (denominated in yuan) in the MSCI Emerging Markets Index. The Chinese market, as represented by CSI 300, had a muted reaction to the move, which opened up the world’s second-largest economy to billions in international investment. The CSI 300 index, consisting of A-share stocks, had a slightly positive return over last week, remaining within one standard deviation of the forecast provided by Axioma’s China Model at the beginning of the period. Total risk for the index was unchanged for the week. The Size factor returns were the largest in absolute terms among the other style factors in the China Model, for the rolling week, month, three months and six months, rising to 2%, 3%, 13%, and 14%, respectively. This indicates that large-cap stocks strongly outperformed small-caps over these horizons.

At the same time, both the Russell 1000 and Russell 2000 indices have seen sharp declines in risk since November 2016, the risk of Russell 1000 has fallen more rapidly, making Russell 2000 much riskier relative to the Russell 1000. The gap between medium-horizon risk forecasts for the Russell 2000 and Russell 1000 (as measured by Axioma’s fundamental US4 model) has widened from 4 to 5 percentage points since the US November elections, although forecasts for both indices shrunk. As of last Thursday, the Russell 2000 was more than 64% riskier than its large cap index counterpart. This relative level of riskiness of the Russell 2000 at the medium-horizon has not been seen in the past 10 years. A similar level, although lower (57%), was last observed in January 2007. The ratio between Russell 2000 and Russell 1000 short-horizon risk forecasts reached a decade-high peak of 1.76 in May; it has since receded but it remains elevated, ending last week at 1.6. Investors making a small-versus-large cap decision may want to keep this relative disparity in risk in mind, as it suggests the need for more conviction in relative return forecasts.

Lastly, as the Swiss stock market climbed, the country recorded the largest quarter-to-date increase in risk among developed countries. Switzerland started the quarter as the second least risky developed country after Singapore, as measured by Axioma’s short-horizon fundamental Worldwide Model. In Q2, the country’s risk rose about two percentage points. Its level of risk of 10%, as of last Thursday, placed it somewhere in the middle of the developed countries’ risk, a higher relative level than we have observed for quite some time. The volatility of the Swiss franc, however, remained at the low end of its six-month volatility range.

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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.