Equity Risk Monitor Insights

Week of April 27

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 France’s risk increased last week, up about two percentage points from the prior week, and overall risk for FTSE Developed Europe rose about 1.5 percentage points (even as the market gained). Europe was not alone among major markets seeing higher risk, with the Russell 1000 up more than 60 basis points, FTSE Japan up almost 1%, and FTSE Developed posting an increase of over 90 bps. FTSE Asia-Pacific ex-Japan and Australia, on the other hand, were basically flat. France also became riskier relative to other European countries. Earlier this month the risk of France as a percent of the total risk of FTSE Developed Europe was slightly lower than what would be implied by its weight in the index, whereas by the end of last week they were equal.

We have also noticed that the French elections appear to have impacted individual correlations. As overall risk rose, rolling 20-day correlations jumped substantially over the past couple weeks within FTSE Developed Europe, although they ended last week slightly below the recent peak. This increase stands in contrast to declining correlations (on top of already low levels) in the other markets we track closely.

Lastly, at the beginning of this year, the risk/return chart showed wide divergence of risks in individual emerging market countries, with a few, such as Brazil, standing out with much higher risk than the others. There were also a number of emerging countries, including Russia, with lower risk than the average developed market. As of last week, that picture had shifted sharply, with risk and return for most emerging countries converging, meaning higher risk and lower return, as compared with their developed market counterparts. Still, while the risk/return tradeoff over the past six months has favored developed markets, all countries have experienced positive returns.

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Melissa 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.