Equity Risk Monitor Insights

Week of April 12

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 how Russia’s risk tends to rise as its return tumbles. It was only four months ago that Russia was the best performer among both developed and emerging countries, based on prior six-month returns. Russia saw its six-month return drop last week to 5% from almost 20% in mid-December. Its equity risk increased by more than 2 percentage points over the same period, exceeding 12% last Wednesday, as measured by Axioma’s short-horizon Worldwide fundamental model. Russia’s weight in the FTSE Emerging index was about 5% and its risk contribution to the benchmark slightly exceeds its weight. In contrast to the equity market, the ruble had the highest six-month return among the major emerging market currencies, and is at the low end of its six-month risk range (both versus the US dollar).

We also noticed that Size is the most volatile factor across many regions. Returns to the size factor stand out from those of other factors, most notably in the US. In the period immediately after the US election, small stocks ruled the day, and the factor saw an unusually negative return. The new year also brought a turnaround in the factor’s performance, as it turned sharply positive. As a result, Size became the riskiest of the US style factors, taking over from Market Sensitivity. In other regions the returns to Size were not as dramatic, but it also ended last week as the riskiest style factor in Japan, Asia ex-Japan, Europe, and Emerging Markets.

Lastly, we have noted that one oft-cited reason for the current low level of market volatility is that investors are uncertain and therefore sitting on the sidelines. The data on trading volume does not bear this out. Over the past six months many markets saw volume peak around the time of the US election, and then plummet through mid-January. But lately volume has risen in a number of markets. Volume in Emerging Markets reached a six-month peak recently, as did Asia ex-Japan. FTSE Developed Europe saw a peak in mid-March but even more recent volume has been close to the six-month high. The same is true for the FTSE 350, the TSX Composite, and the ASX 200. Only the Russell 1000 and FTSE Japan, among the major markets we track, have seen trading activity well off the recent peak, meaning that FTSE Developed’s has fallen, too.

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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.

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