Equity Risk Monitor Insights

Week of July 13

This week we noted that risk rose in Emerging Markets, as leading central banks began to wind down monetary stimulus programs. After a period of relatively steady decline, all four variants of Axioma’s Emerging Markets model climbed last week. The short-horizon fundamental model recorded the highest weekly increase at 90 basis points. The decomposition of the change in risk from the standpoint of a full dense matrix revealed that the rise in risk was driven by the increase in the stock correlations. Risk remained flat or decreased in all other regions Axioma tracks closely, except in Asia Pacific ex-Japan (which is heavily influenced by emerging markets). Emerging Markets’ returns have been quite strong (only Russia and South Africa have seen negative returns in the last six months), but with central banks backing off their easy-money policies, their attractiveness diminishes, and investors look to geographies with lesser risk but comparable returns.

We also noted that Japan’s volatility has dropped in 2017 to levels in line with the rest of the world. Japan witnessed the largest reduction in short-horizon fundamental risk over the past week, month, three months and six-months among all geographies Axioma monitors closely. Equity risk in Japan retreated more than 20% since January—as measured by Axioma’s Japan short-horizon fundamental model—to lows not seen since 2005. Additionally, the short-horizon statistical and fundamental Japan models were finally in agreement last week. The short-horizon fundamental risk gap between Japan and the US narrowed substantially from six months ago when it stood at 9%, to 4% last Thursday.

Lastly, the Australian market, as represented by the ASX 200 index, was among the poorest performers during the first half of the year, but the Profitability style factor (a component in our new AU4 model) surfaced among the Aussie winners. The style factor recorded strong positive returns over the past week, month, three months and six months. Profitability’s six-month return of 2.9% was exceeded only marginally by that of Medium-Term Momentum. In the US and Japan (the other two models that include Profitability), the factor generated much more modest six-month returns of 0.3% and 0.2%, respectively. For more details on factor returns during Q2 and the first half of the year, see our new Q2 2017 Insight Report.

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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.