Axioma Risk Monitor
Equity edition

Grim economic data halts US market rally
Health Care becomes second-largest sector globally
Asset diversification remains low worldwide




Grim economic data halts US market rally


After posting one the largest monthly gain in April, the US market remained relatively flat last week, as investors were caught between optimism over the easing of lockdown measures and grim economic data. Since the US market bottomed out in late March, equity shares have been rising, buoyed by prospects of a gradual reopening of businesses around the country. Then came the bad news, as US consumer spending posted its largest-ever monthly decline in March, along with a continued contraction of US manufacturing and a surge in unemployment claims to over 33 million since mid-March. Risk fell slightly last week, adding to the monthly decline, which totaled 300 basis points, as measured by Axioma’s US short-horizon fundamental model.

See graph from the Russell 1000 Equity Risk Monitor as of 7 May 2020:


Health Care becomes second-largest sector globally


Large shifts in sector weights and risk contributions have been recorded in the global equity market this year. Information Technology and Health Care now make up a much larger proportion of the STOXX Global 1800 index. Information Technology remained in the lead, its weight in the index surpassing 20% last Thursday. Health Care replaced Financials as the second-largest sector in the index. While Info Tech’s contribution to the benchmark risk was higher than its weight, the opposite was true for Health Care.

Financials, Energy and Industrials, which have suffered some of the largest year-to-date losses, saw their weights drop significantly in the global index. While their contributions to risk also fell lower from where they had been only six months ago, Financials, Energy and Industrials contributed to the benchmark risk more than their weights would otherwise suggest. Investors making sector bets, in particular unintended sector bets, may notice a shift in how sectors are contributing to overall portfolio risk and return and may want or need to make some portfolio changes.

See graph from the STOXX Global 1800 Equity Risk Monitor as of 7 May 2020:



Asset diversification remains low worldwide


Despite a decline in short-term asset correlations from March peaks, asset diversification remained low, indicating a decreased ability for portfolio managers to adequately diversify their portfolios. The diversification ratio for the STOXX Global 1800 index dropped precipitously at the end of February, and has been hovering below 2.0 since mid-March, as measured by Axioma’s Worldwide medium-horizon fundamental model. The diversification ratio is calculated as the weighted average of total risk forecast for each stock in the index, divided by the total forecasted index risk, and measures the impact of correlations (in this case longer-term correlations) on total risk—which remained relatively flat over the past month and a half. We would expect the ratio to rise as the recent drop in correlations starts to impact longer-term correlations.

See graph from the STOXX Global 1800 Equity Risk Monitor as of 7 May 2020:



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