Axioma Risk Monitor
AXIOMA RISK MONITOR
Equity edition

Developed Market risk approaching 2009 levels
Investors seek cover in larger-cap stocks
Size and Profitability decouple from other style factors
World currencies plunge against the US dollar, as their risk spikes

This week Qontigo is excited to introduce our new STOXX Global 1800 Equity Risk Monitor. This new Risk Monitor will highlight the same useful data we already produce for 11 other markets worldwide.
 

HIGHLIGHTS FOR THE WEEK ENDED MARCH 19

 
 
 

Developed Market risk approaching 2009 levels

 

As markets wavered last week, the medium-term risk of developed markets rose 100 basis points, a small amount compared with the previous week, when it shot up 11 percentage points. Risk has almost tripled for developed markets, as represented by the STOXX Global 1800 index, since the year-to-date low of 9.6% on February 21. While not (yet) at the volatility peaks of the global financial crisis, the risk of the STOXX Global 1800, which stood at 26% as of last Thursday, was comparable to levels seen in the summer of 2009, as measured by Axioma’s medium-term fundamental model.

Until recently, it was market risk that drove the increase in total risk, but now all components of risk have gone up: stock-specific, style, industry, country and currency risk. Industry risk for the STOXX Global 1800 index has more than doubled in the past 20 days. Style, country, and currency risk rose more than 60% over the same period, while stock-specific risk—which represents a small part of total benchmark risk—went up about 25%.

See graph from the STOXX Global 1800 Equity Risk Monitors as of 19 March 2020:



 

Investors seek cover in larger-cap stocks

 

Large-capitalization stocks strongly outperformed their small-cap counterparts in most regions Axioma tracks closely, in an extremely volatile environment. The Size factor posted positive one-week returns in all regions Axioma tracks closely, except in China and Japan. Most notably, Size returned 13.5% in the UK last week alone. The style factor saw a cumulative weekly return of 3% in the Worldwide (WW4) model and 3% in the Emerging Markets model. In fact, Size reported strong positive returns at the one-week and one-, three-, and six-month horizons in all geographies Axioma models track closely, except for China, Japan and Emerging Markets. That is, large capitalization stocks strongly outperformed their smaller cap counterparts over these periods in most regions.

The volatilities of most style factors in Axioma’s WW4 medium-horizon fundamental model were positioned last week at or near the high ends of their six-month ranges. The one exception was Medium-Term Momentum, which saw higher levels of volatility in September of last year, during the short-lived factor reversal. Size was the second most volatile style factor after Market Sensitivity last week. For more details on recent style factor performance, see blog post Quant Quake 2020? As Factor Volatility Mirrors Market Volatility, Most Returns Head in the Wrong Direction.

See graphs from the STOXX Global 1800 Equity Risk Monitors as of 19 March 2020:


 

 

Size and Profitability decouple from other style factors

 

The large swings in style factor returns also meant big changes in factor correlations. Size and Profitability have become considerably less correlated (or much more negatively correlated) with most other style factors in Axioma’s WW4 medium-horizon fundamental model. Size and Profitability correlations with Leverage, Liquidity, Growth and Dividend Yield were all around or more than -0.30 as of last Thursday. Leverage was the most negatively correlated with Size (-0.47) and Profitability (-0.52).

On the flip side, Profitability’s correlation with Size tightened to 0.45 last week, an increase of 0.43 from six-months ago. Size saw the largest changes in correlations, of -0.64 and -0.60, with Leverage and Liquidity, respectively, over the past six months. Investors tilting their portfolios on multiple style factors may see a big and unexpected impact on their portfolio risk due to changing factor correlations.

See graph from the STOXX Global 1800 Equity Risk Monitor as of 19 March 2020:


 

 

World currencies plunge against the US dollar, as their risk spikes

 

Major developed and emerging market currencies plunged against the US dollar, as Central Banks across the world tried to rescue their economies. Most major currencies were pushed to the low ends of their six-month return ranges and posted large six-month losses against the greenback. The biggest losers were the Australian dollar and Norwegian krone among developed currencies, and the Russian ruble and a suite of Latin American currencies—the Mexican peso, Colombian peso, Chilean peso, and Brazilian real—among emerging currencies. Even currencies regarded as safe-haven assets, such as the Japanese yen and the Swiss franc, which investors typically flock to in times of crises, posted negative six-month returns as of last Thursday, albeit they did not reach the bottom of their six-month return ranges, yet. No developed currencies, and only few emerging market currencies, were able to stay in the black with six-month positive returns, namely the Egyptian pound, Taiwanese dollar, Philippines peso and Chinese yuan.

Risk jumped for currencies in both categories, all shifting to the high ends of their volatility ranges against the US dollar, except the Turkish lira. While the Turkish currency’s volatility stayed close to the low end of its volatility range, the lira remained among the riskiest currencies. As of last Thursday, the riskiest developed currency was the Norwegian krone (at 16.6%), while the Russian ruble and Colombian peso were tied for first place (at 18.6%), as measured by Axioma’s US short-horizon fundamental model.

See graphs from the Developed and Emerging Equity Risk Monitors as of 19 March 2020:


 

 

 
 
Stay Connected
 
 

Events

Webinar | Managing Your Portfolio in an Extreme US Factor Environment

Date: March 25, 2020
Time: 11:00 AM ET | 8:00 AM PT

In this webinar, co-hosted with Omega Point, we’ll discuss how the current US risk environment may be affecting your portfolio’s factor exposures and returns and what you can do to stay ahead of the curve.

Register here >


Webinar | Managing Your Portfolio in an Extreme EMEA Factor Environment

Date: March 26, 2020
Time: 2:00 PM GMT | 3:00 PM CET

In this webinar, co-hosted with Omega Point, we’ll discuss how the current EMEA risk environment may be affecting your portfolio’s factor exposures and returns and what you can do to stay ahead of the curve.

Register here >


Webinar | Qontigo Insight™ Q1 2020 Risk Review

Date: April 7, 2020
Time: 11:00 AM ET | 4:00 PM BST

With volatility skyrocketing in the first quarter, it is more important than ever for managers to understand the risk environment, and in particular know how to mitigate unwanted risks. In this webinar we will review first-quarter risk results starting from the benchmark level, and then drill down into specifics from country, sector, style and other components of risk.

Register here >


Insights

Qontigo Commentary: Coronavirus’ Impact on Markets

Over the past few months, the world has been greatly affected by the extensive spread of the COVID-19 virus. To help our subscribers better understand the impact of these events, Qontigo's Applied Research team put together a collection of market analysis and commentary.

Axioma Risk Monitor

The Axioma Risk Monitor reports use Axioma’s solutions to bring you insights on trends in market and portfolio risk. You can subscribe to both the multi-asset class and equity edition here.

 
Qontigo ROOF Scores

Qontigo's ROOF Scores were created to quantify market sentiment — bullish or bearish? ROOF is an acronym for Risk-On/Risk-Off market conditions; the Scores are calculated from the factor returns to eight style factors from Axioma’s fundamental factor risk models, plus two indicators of changing market volatility. 



On the Blog

Quant quake comparison? This looks worse

Our recent blog post on factor performance discussed factor returns on an absolute and risk-adjusted basis during the recent market downturn. Many of the returns were shockingly bad, but looking at the full period masks just how painful things were on a daily basis.

USD Corporate Risk: Big Changes in Risk Profiles, Viewed Through the Lens of the Axioma Factor-based Fixed Income Risk Model

It’s no surprise that the risk of corporate portfolios has increased substantially in the past few weeks. High yield saw an almost fourfold increase in risk, while investment-grade posted a twofold increase.

Quant Quake 2020? As Factor Volatility Mirrors Market Volatility, Most Returns Head in the Wrong Direction

Equity investors, needless to say, have faced a brutal market since February 20. But factor-based investors have experienced additional pain from factor returns.

Treasury yields are up and stocks are down… And that spells double trouble for corporate bonds

Since the beginning of the equity sell-off in the last week of February, credit spreads have widened rapidly and significantly.

Equity Markets Fell, Are Angels Next?

The well-publicized fall in equity markets may have overshadowed a potentially much more impactful risk from the corporate bond market – that of fallen angels.

Steep and Swift So Far, This Dive Isn’t Over, if History Is Any Guide

We likely to have further to go in this downturn, and it could take a long time for the market to retrace its steps back to its January level.

Time to put the stress (test) on the coronavirus for a change…

As the immediate effects of the rate cuts wear off, investors are beginning to brace themselves for yet more market turbulence. No one knows, of course, how much more share prices are likely to fall. However, stress testing is a good way of estimating the impact of another stock-market downturn on other asset classes.

Sectors Have Feelings Too: Developing a Sector-Based Sentiment Indicator

Last year we introduced the Qontigo ROOF Scores as a market sentiment indicator. Recently it occurred to us that a similar indicator could be derived using sectors. We could characterize each sector based on its exposure to the style factors in the original methodology and map each sector to a risk-tolerant or risk-averse strategy. 

 

Latest Research

A Sector Variant of the ROOF Score Methodology

In this paper we extend our methodology to individual sector portfolios as a means to establish their ‘personality’ and use their daily ‘popularity’ as building blocks for an aggregate sector-based market ROOF Score.

High-Yield Bonds: Analyzing the Risk and Return Tradeoff When Rates are Negative

In a world where some investors pay the government for the privilege of lending it money, the “hunt for yield” becomes ever more challenging. Using a combination of risk analysis and stress testing, we examine the risk characteristics of corporate bond portfolios, with particular attention on the differences between investment-grade and high-yield securities.

In the News

Financial Investigator - Fixed Income Systematic Investing: Factor-based Portfolio Construction in the Corporate Credit and Bond Markets

In this article we exemplify how the Axioma Factor-based Fixed Income Risk Model, can be used to construct smart beta strategies in the corporate credit and bond markets.

Qontigo's d'Assier on Market Risks Amid Coronavirus

Olivier d'Assier, Head of APAC Applied Research at analytics firm Qontigo , discusses the market risks amid concerns around the coronavirus.

 
 

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