Axioma Risk Monitor
AXIOMA RISK MONITOR
Equity edition

US industry and specific risk at decade highs
Trading volumes still on summer schedule
The yen strengthens, giving Japanese importers an advantage

 

HIGHLIGHTS FOR THE WEEK ENDED AUGUST 28

 
 
 

US industry and specific risk at decade highs

 

As US indices set new records last week, industry and specific risk reached peaks not seen in over a decade. While total equity risk in the US has been declining since April, industry and specific risk have been steadily climbing this year, meaning market risk has been the major driver of the recent decline in total risk. The Russell 1000’s total risk fell eight percentage points since the peak of 33% reached in April, as measured by Axioma’s US4 fundamental medium-term horizon model. Despite the recent drop, total risk remained double its level at the start of the year.

In contrast, industry and specific risk—which are only a small part of total benchmark risk—rose unabatedly, and as of last Thursday were also double their values at the beginning of the year. We have not seen these levels of industry and specific risk in the US since 2009. For more details on the behavior of risk components in the US market, see blog post Current Nagging Concerns—and One Bit of Good News—for Active Managers in the US.

See graph from the US Equity Risk Monitor as of 28 August 2020:




 

Trading volumes still on summer schedule

 

Despite the recent spurt in major stock indices, trading activity has not yet exited the cyclical summer lull. Trading volume for stocks in the STOXX Global 1800 has dropped steeply since the market rout in March, when average daily trading volume hit a near-term record of about US $500 billion. Although it ticked up, trading activity remained below US $300 billion last week. For all sectors in the global index, except Information Technology and Consumer Discretionary, the current levels of trading volume were lower than their respective six-month averages.

See graphs from the STOXX Global 1800 Equity Risk Monitor as of 28 August 2020:


 

 

The yen strengthens, giving Japanese importers an advantage

 

The strengthening of the Japanese yen in 2020 was reflected in the strongly positive six-month return of the Exchange Rate Sensitivity (ERS) factor in Axioma’s Japan medium-horizon fundamental model. The Japanese yen further strengthened, after last week’s news that Japanese Prime Minister Shinzo Abe had resigned for health reasons. ERS recorded the largest positive return among all style factors in the model over the past six months.

The ERS style factor is a measure of a stock's sensitivity to movements in its domestic currency relative to a basket of currencies, net of the market. Stocks with highly positive ERS scores tend to appreciate with the local currency, which means we think of them as importers, which also suffer as the currency falls. The opposite is true for those with negative exposures—potentially exporters—that benefit from a depreciating currency. ERS’ six-month return approached 6% last week, indicating that Japanese import-related companies benefited, while export-related companies took a hit during this period.

See graph from the STOXX Global 1800 Equity Risk Monitor as of 28 August 2020:

 

 

 
 
Stay Connected
 
 

Events

Webinar | How to Invest in the UN Sustainable Development Goals (SDGs)

Date: September 10, 2020
Time: Select Preferred Presentation

How do you identify SDG investments and what are Sustainable Development Investments? Join us as we tackle these questions and more with the Sustainable Development Investments Asset Owner Platform (SDI AOP), comprised of four leading global asset owners: APG, AustralianSuper, British Columbia Investment Management Corporation and PGGM.

Acting as exclusive distributors for the SDG data that has been developed by the SDI AOP, we invite all asset owners and asset managers* to learn about the initiative in this webinar.


Register here >


Webinar Recording | Qontigo Insight™ Quarterly Multi-Asset Risk Review

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

Watch the recording here >


On the Blog

Current Nagging Concerns—and One Bit of Good News—for Active Managers in the US

The US market hit an all-time high this week. So are we finally out of the volatility woods? Not by a longshot. While US predicted risk as measured by Qontigo’s short-horizon fundamental model has retreated substantially, it remains in the top decile of values relative to where it has been historically. It would have to drop by almost 50% from its current level just to get back to the long-term median.

Odds Are Good that Markets Will Keep Rising… as Long as Volatility Declines

Many pundits have called the recent market rally a bubble, reminiscent of the tech bubble of the late ‘90s. But a bubble is characterized by a cycle of ever-increasing and lofty return expectations. Declining volatility is making the current market bull run possible with declining return expectations. To quote Alanis Morissette, “Isn’t it ironic, don’t you think?”

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.

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