Axioma Risk Monitor
AXIOMA RISK MONITOR
Equity edition

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

 

HIGHLIGHTS FOR THE WEEK ENDED MAY 7

 
 
 

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:


 

 

 
 
Stay Connected
 
 

On the Blog

Corporate Credit Portfolio Construction: Targeting low-beta names during the COVID-19 Market Crisis

In this post we investigate how a portfolio constructed to optimize exposure to the Beta style factor performed through the market crisis.

Frequently Tax Optimize or Drift Away and Lose Tax Alpha

When clients invest in tax-managed investment strategies, their goal is to track the model portfolio, while harvesting as many losses as possible. The challenge, of course, is that these two requirements are at odds with one another.

Is BB the new BBB?

The recent decision by the Federal Reserve Bank to add high-yield funds to its asset-purchasing program triggered unprecedented flows into exchange-traded funds specializing in sub-investment grade securities. At the same time, newly issued debt from recently downgraded issuers was greeted by record demand.

Latest Research

Mean-Reversion and Market Recoveries: Stocks Hit Hardest First Tend to Outperform… Will Covid-19 Follow the Pattern?

Do equities that suffer the greatest losses in the initial stages of a major market downturn subsequently outperform during the recovery? Here we examine the 10 largest US equity downturns of the past 38 years along with the current Covid-19 market crisis focusing on the performance of the worst performing quintile during the initial downturn.

Events

Webinar Recording | Under the Microscope: Examining the Coronavirus Through the Lens of Multiple Fixed Income Risk Models

In this webinar, Christoph V. Schon, Qontigo’s Executive Director of Applied Research, explained how the recent environment can be examined with a combination of fixed income risk models and stress tests.

Watch the recording 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. 



 
 

MiFID II Statement: Axioma (now part of Qontigo) believes that the research we provide falls outside the purview of the MiFID II regulations, which are intended to provide transactional transparency and unbundle research and trading costs. Axioma does not provide recommendation research, is not a regulated company and our business is not transactional. As such, we do not believe that we are subject to MiFID II regulation. For more information, please click here: MiFID II Statement.

Axioma  17 State Street, 2700    New York  NY  10004  United States