Axioma Risk Monitor
Equity edition

Correlations and volatilities ease globally, with some exceptions in Asia
Asset diversification remains low worldwide
Small-cap shares thrive in the UK




Correlations and volatilities ease globally, with some exceptions in Asia


Equity markets continued to climb worldwide last week, despite a surge in coronavirus cases in some countries, mixed economic signals, and increased tensions between China and the US. At the same time, volatility and correlations at the individual country level have eased around the globe, with some exceptions in Asia and Middle East. This was underscored by the latest charts of global volatility and correlation hotspots, which were peppered with downward arrows, reflecting sharp decreases in volatility and correlations in most countries.

Volatility forecasts from Axioma’s Worldwide short-horizon fundamental model fell more than one percentage point, while correlations declined by more than two percentage points last week, particularly in Europe, the Americas and a number of countries in Asia. The main exceptions were China, Japan, South Korea and Taiwan, where both correlations and volatility increased over the past five days.

See graphs from the Equity Risk Monitors as of 23 July 2020:


Asset diversification remains low worldwide


Despite a decline in asset correlations from March peaks, asset diversification remains low, indicating a decreased ability for portfolio managers to adequately diversify their portfolios. The diversification ratio for the STOXX Global 1800 index dropped abruptly at the end of February, falling to at least an eight-year low in mid-March, as measured by Axioma’s Worldwide medium-horizon fundamental model. Since then, the ratio has been gradually increasing, though it has remained below 2.0 over this period. 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 on total risk.

See graph from the STOXX Global 1800 Equity Risk Monitor as of 23 July 2020:



Small-cap shares thrive in the UK


Small-capitalization shares have been outperforming their large-cap counterparts in the UK over the past three months, as the UK market witnessed a slowdown in trading activity. Average trading volume in the UK has fallen since April, dipping below $5 billion last week. The UK Size factor has also tumbled during this period, posting a cumulative three-month return of close to -6%, as measured by Axioma’s UK median-horizon fundamental model. The style factor’s small climb over the past four weeks was insufficient to offset the strong negative returns seen in prior months that resulted in a negative six-month cumulative return of almost 7% for Size in the UK by the end of last week. In contrast, large caps fared better in most other Axioma models over the past six months. Most notably, US Size recorded the highest positive six-month cumulative return of 6% across Size factors in all of Axioma’s medium-horizon fundamental models.

Volatility remained high for all style factors in the UK model, with all factors nearing the high ends of their six-month volatility ranges. The volatility for Size surpassed that of all other factors in the UK model at about 15%. UK Size was also the riskiest factor across all other factors in all of Axioma’s models.

See graphs from the UK Equity Risk Monitor as of 23 July 2020:



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