Axioma Risk Monitor
AXIOMA RISK MONITOR
Equity edition

Medium-horizon market volatility remarkably stable – but high
Style factor volatilities also remain high
Value finally has a moment — but not in all markets

 

HIGHLIGHTS FOR THE WEEK ENDED JUNE 25

 
 
 

Medium-horizon market volatility remarkably stable—but high

 

As we have noted frequently, the predicted volatility of the STOXX Global 1800 index jumped dramatically in February and March. Since then, it has stabilized, especially at the medium horizon, but at a level that is higher than all but about 5% of days since 2000. Only during the global financial crisis was global market volatility was so high—and it did not start to decline until the market began to recover. In contrast, we observe a high current level of risk despite the recovery. While central banks have vowed to support the economy, which has helped to prop up markets, COVID remains a potent threat, as do potential continued trade wars. In the meantime, the market seems to be wavering between the positives and negatives, thereby driving volatility higher. We also note that this picture looks quite similar across most markets we track closely, but that short-horizon volatility has started to decline in some cases.

See graph from the STOXX Global 1800 Equity Risk Monitor as of 25 June 2020:



 

Style factor volatilities also remain high

 

While we’re on the subject of volatility, we also note that style factor volatility remains high. Our charts show it at the high end of the range observed over the past six months, which is close to all-time highs. Accompanying the high volatility are some significant changes in correlations, compared with six months ago. For example, the correlation between Exchange Rate Sensitivity and Market Sensitivity fell from slightly positive to highly negative. We addressed this topic and its impact on portfolio risk in a recent blog post, and it remains a front-and-center issue, not only for quantitative managers or managers with a particular style, but for anyone analyzing or managing active portfolio risk.

See graphs from the US Equity Risk Monitor as of 25 June 2020:


 

 

Value finally has a moment—but not in all markets

 

We have been eagerly awaiting our opportunity to write this headline for some time. Across most markets except Japan, Value suffered substantially earlier this year, producing negative returns early on, which just accelerated with the market decline. Results have been mixed since then, and the factor’s volatility has remained elevated. However, returns were strong in June and quarter-to-date in many markets. The quarter-to-date return in the UK was more than two standard deviations above the long-term average, and that was also the case for Value’s June return in Canada and Emerging Markets. Returns remained disappointing in the US, however, and the quarter-to-date return in Japan was more than four standard deviations below average, even with the slight uptick this month. It is clearly too early to declare the reemergence of Value as a source of alpha, but at least its current path looks better than it has for a while. We will have more on the topic of factor returns in our upcoming Insight report and webinar. See the sidebar for a registration link for the webinar.

The chart below consolidates Value factor returns across markets. Data is as of 25 June 2020.

 

 

 
 
Stay Connected
 
 

Events

Webinar | Qontigo Insight™ Q2 2020 Risk Review

Date: July 8, 2020
Time: 11:00 AM ET | 4:00 PM BST


Although equity markets seem to have recovered much of the ground they lost in Q1, volatility remains high, certain style factors have been behaving “badly” and dispersion of risk and return across countries and currencies is widening. In this webinar, Melissa R. Brown will discuss all these aspects of the risk environment in the second quarter and more.


Register here >


Webinar | Qontigo Insight™ Q2 2020 Risk Review, APAC

Date: July 15, 2020
Time: 10:00 AM HKT | 11:00 AM JST

In this webinar, Olivier d'Assier will discuss various aspects of the risk environment in the second quarter and more.


Register here >


On the Blog

Fed bond purchases do little for leveraged firms

Much of the recent market turmoil has been driven by worries about debt. Granted, debt is not a bad thing, per se. But the fact that many households and corporations must now borrow extensively just to stay afloat is a major concern. This is reflected in both wider credit spreads and the fact that the shares of heavily leveraged companies have significantly underperformed the overall market.

CDS: Examining the negative basis

In our Fixed Income Chart of the Week for 8 June 2020, we noted that the CDS basis for names in the Markit iTraxx Europe index had gone significantly negative in March, which struck us as very unusual.

The top 10 cross-asset correlations to watch

In many of our recent blog posts and webinars, we noted how the COVID-19 crisis had disrupted the long-established co-movements and interactions of major asset classes. Some flipped signs, many broke down, and a few remained remarkably stable. In this blog post, we take a look at some of the most notable asset-class pairs.

The shifting sands of sector risk… When low-volatility sectors become high-volatility — and vice versa

The coronavirus crisis has driven large changes in the relative risk of US sectors. Traditionally defensive sectors, such as Real Estate and Utilities, lost their defensiveness, while typically cyclical, high-beta sectors, such as Info Tech, turned more defensive.

Latest Research

Introducing STOXX® Factor and ESG-X Factor Indices: Get More From Your Premia Exposures

In this paper, Qontigo’s Applied Research Team presents the recently launched STOXX Factor and ESG-X Factor Indices. STOXX Factor Indices are designed for investors who want to reap factor premia while avoiding the noise that pervades many other such products that allow undesired exposures.

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. 



 
 

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