Axioma Risk Monitor
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

 

HIGHLIGHTS FOR THE WEEK ENDED JULY 23

 
 
 

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:


 

 

 
 
Stay Connected
 
 

Events

Webinar | Making Sense of the COVID-19 Crisis With Quantitative Tools

Date: July 29, 2020
Time: 11:00 AM ET | 4:00 PM BST

In this webinar, Christoph Schon demonstrates how quantitative tools, such as factor risk models and stress tests, can be used to make sense of the recent market environment.


Register here >


Webinar | Qontigo Insight™ Quarterly Multi-Asset Risk Review

Date: August 12, 2020
Time: 11:00 AM ET | 4:00 PM BST

Join this webinar to hear more about how this ongoing disconnect between bond markets and stock markets affected multi-asset class portfolio risk.


Register here >


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

Alpha Calibration: Aligning Your Portfolio Construction Process for Optimal Results

For both quantitative and fundamental managers, alpha calibration is a critical part of the optimal portfolio construction process – but are you doing it right? Most optimization processes include an objective function with one or more terms. When multiple terms are included, managers often mix and match the scaling of the terms which is asking the optimizer to compare apples to oranges and leads to less relevant or suboptimal allocations.

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.

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. 



 
 

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