Axioma Risk Monitor
AXIOMA RISK MONITOR
Equity edition

Emerging Markets now the second least-risky region
LATAM currencies lead in volatility
Earnings Yield factor underperforms worldwide

 

HIGHLIGHTS FOR THE WEEK ENDED JULY 16

 
 
 

Emerging Markets now the second least-risky region

 

Emerging market stocks fell last week, as their developed market counterparts continued the ascending trend started in April. The fall in Emerging Markets remained within one standard deviation of the predicted risk at the beginning of the week, as measured by Axioma’s Emerging Markets short-horizon fundamental model. The one- and three-month returns for Emerging Markets were still in positive territory, although six-month returns remained in the red.

Despite China’s dominance in the Emerging Markets index, China’s recent spike in risk has not been reflected in the index. While China’s risk continued to rise last week, for a total monthly increase of close to nine percentage points, Emerging Markets’ risk fell slightly last week, with a total decline in risk of 3% over the past four weeks, as measured by Axioma’s China and Emerging Markets short-horizon fundamental risk models, respectively. For more details on the discrepancies between China and Emerging Markets in aggregate, see blog post Emerging Markets lag China in equity-market gains, but also risk. Emerging Markets became the second least risky (after Japan) among all geographies Axioma tracks closely.

See graph from the Emerging Markets Equity Risk Monitor as of 16 July 2020:



 

LATAM currencies lead in volatility

 

Major currencies in Latin America led the way in risk, as the coronavirus raged throughout the region. While moving away from the high ends of their six-month volatility ranges against the US dollar, the Brazilian real, Mexican peso, Colombian peso and Chilean peso were some of the riskiest major emerging market currencies. All four posted negative six-month returns against the greenback. Currency losses had a large negative impact on Emerging Markets’ year-to-date negative performance (in US dollars). The Brazilian real was the biggest loser, with a six-month decline exceeding 20% as of last Thursday. The Brazilian currency also recorded the highest volatility, of over 20%.

See graph from the Equity Risk Monitors as of 16 July 2020:

 

 

Earnings Yield factor underperforms worldwide

 

The Earnings Yield style factor has underperformed worldwide, as investors continued to favor higher growth. The Earnings Yield factor in Axioma’s Worldwide medium-horizon fundamental model recorded the second-highest negative six-month return (-1.7%) after Dividend Yield among all style factors in the model. The factor saw an uptick over the past week, but not enough to turn the three-month or six-month returns positive. Earnings Yield posted six-month negative returns in all of Axioma’s models that include this factor.

See graph from the STOXX Global 1800 Equity Risk Monitor as of 16 July 2020:


 

 

 
 
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On the Blog

Emerging Markets lag China in equity-market gains, but also risk

China’s weight may dominate Emerging Markets, but returns and risks have gone their own way. Emerging Markets in aggregate have not mirrored China’s recent equity-market gains. And while China’s risk has spiked, Emerging Markets’ risk has continued to fall.

Sentiment as a Systematic Factor: Introducing Qontigo’s ROOF™ Market Portfolios

Used in conjunction with the ROOF Scores, the ROOF Market Portfolios can form the basis of a sentiment-aware active strategy. Active return will then come in the form of either premiums obtained from those wishing to acquire the desired exposures, or discounts from those wishing to dispose of the unwanted ones, and will be based on the supply and demand for risk in the market at that time.

Latest Research

The Weakening Index Effect

The Index Effect has weakened significantly since 2011. The Index Effect is the phenomenon where stocks that are added to an index experience positive excess returns in the days before being officially added, while stocks that are removed from an index experience negative excess returns. The weakening of the Index Effect has been pronounced for large- and mid-cap stocks, though it still can be observed in many indexes with small-cap stocks.

Introducing ROOFTM Market Portfolios: Capitalizing on the Mood Swings of Markets?

Qontigo is pleased to introduce ROOFTM Market Portfolios. These portfolios will enable investors to benefit from the insights inherent in the ROOF scores, so they can not only track investor sentiment, but use it as an investment guide — thus providing increasingly meaningful opportunities for portfolio managers to enhance performance.

Qontigo Insight Q2 2020 Risk Review: The Storm After the Storm?

Equity markets posted one of the best quarters in more than a decade, but most were not able to cross into black territory for the year. Volatility — of benchmarks, sectors, risk model factors, etc. — came down from the year-to-date peaks, though remained high. Style factors saw an unusual performance, increased volatility, and large changes in factor correlations, which likely had a significant impact on active risk.

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.

 
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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