Axioma Risk Monitor
AXIOMA RISK MONITOR
Equity edition

US riskier than most emerging — and all developed — countries
Smaller stocks in the UK thrive in recent crisis
Risk and return spreads across currencies widen

 

HIGHLIGHTS FOR THE WEEK ENDED JUNE 18

 
 
 

US riskier than most emerging—and all developed—countries

 

The US became the riskiest developed country as coronavirus cases started to rise again and civil unrest continued, despite the Fed’s reassurance and encouraging jobs reports. The US was not only the most volatile developed country, but its risk surpassed that of most emerging countries, as measured by Axioma’s US short-horizon fundamental model. The only countries with higher levels of risk than that of the US as of last Thursday were Colombia, Indonesia, Chile and South Korea.

The US equity market recorded a loss of 10% over the past six months, performance that placed US somewhere in the middle of the pack in terms of returns by country during this period. While US’s return was similar to that of many other countries, the path it took to get there was much more volatile, as evidenced by its higher current volatility. In contrast, four emerging countries posted positive returns over the same period: Turkey, China, Taiwan and South Korea. There was also one developed country that shifted to the positive territory—Denmark. As we discussed in our blog post, Denmark has benefited during this crisis from its low beta to the European market and the Pharmaceutical industry’s heavy weight in its market.

See graph from the Equity Risk Monitors as of 18 June 2020:



 

Smaller stocks in the UK thrive in recent crisis

 

Small capitalization stocks in the UK have fared much better than larger-cap shares since April. This may be a consequence of large-cap stocks being more liquid and therefore easier to discard in times of crisis, but even as the UK market climbed back in recent months smaller UK companies still thrived. The Size style factor in Axioma’s UK median-horizon fundamental model has fallen precipitously since April, recording a staggering three-month return of -15%, meaning small-cap stocks strongly outperformed their large-cap counterparts over this period. The factor also recorded the most negative six-month cumulative return among its peers in the UK model.

See graph from the UK Equity Risk Monitor as of 18 June 2020:

 

 

Risk and return spreads across currencies widen

 

Risk and return spreads have widened since the beginning of the year among both developed and emerging currencies. The six-month return against the US dollar of major emerging currencies ranged from -25% to 5%, with the Brazilian real at the bottom of that range and the Egyptian pound at the top. Emerging currency volatilities were also widely spread, with levels from about 2% to over 20%, as measured by Axioma’s Worldwide fundamental short-horizon model. The same two emerging currencies that bookended the returns space were also at the high and low ends of the volatility range, i.e., the Brazilian real and Egyptian pound, respectively.

Developed currencies saw a similar pattern, with most major currencies’ six-month return against the greenback below zero. Although developed currency volatilities were positioned within a narrower band (-5% to +5%) than their emerging counterparts, their spreads have widened since beginning of the year. Even more disparity was seen in developed currency volatilities, which ranged from 5% to 20%, compared with 1% to 8% only six months ago. The Swiss franc posted the largest gain against the US dollar over the past six months, while the Norwegian krone was the biggest loser among developed currencies. In terms of risk, the krone was also the riskiest among major developed currencies, but the Singapore dollar was the least risky as of last Thursday.

See graph from the Emerging Markets Equity Risk Monitor as of 18 June 2020:

 

 

 
 
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