For those who missed last week’s Factor Spotlight, my name is Chris Martin, Product Manager at Omega Point, with a follow-up post on Exchange Rate Sensitivity. If you did miss it, last week’s post is a potentially helpful primer for this week’s edition. All of us at Omega Point hope that you and your families remain healthy and safe as we collectively ride this out.
Exchange Rate Sensitivity (“ERS”) - Analyzing the Extremes
To better understand the characteristics of companies with extreme exposures to ERS, we create two portfolios based on Axioma US4-MH’s ERS factor. Below is our methodology for creating these extreme portfolios:
We see that the Low portfolio has much higher beta (Market Sensitivity), with both the High and Low having higher excess volatility and more liquid smaller cap names. We also see the Low portfolio has a lower Profitability exposure, lower Earning Yield exposure, and higher Value exposure. Although there are certainly some difference in Style exposures, the differences aren’t as big as one may expect given the extreme portfolio construction methodologies - we certainly saw big differences in Industry weights.
We see that the end of 2019 the High and Low portfolios are allocated across the industries we’d expect to be sensitive to exchange rates. The High portfolio is allocated in Industries that generally rely on exports, whereas the Low portfolio is allocated in Industries that generally import. Please note that this chart does not indicate that every asset within these Industries have either high or low Exchange Rate Sensitivity exposures, rather, this helps us understand the market cap weighted allocation across Industries for high and Exchange Rate Sensitivity exposure assets. For example, domestic shale producers in Oil, Gas & Consumable fuels likely wouldn’t have as low Exchange Rate Sensitivity exposure as they produce oil domestically as opposed to importing it.
We start by looking at Extraction Oil and Gas XOG — a security which is in the 2019/Low portfolio and in the 2020/High portfolio and whose Exchange Rate Sensitivity changed the most from 12/31/2019 to 4/9/2020:
Below is XOG’s YTD performance from Exchange Rate Sensitivity, showing a large move between March 23-26:
We’ve seen some big changes in the normally docile ERS factor driven by outlier events. It remains to be seen if securities with extreme changes in ERS remain at their current levels, if they start to trend back to their longer term averages, or if they will swing wildly again with the appearance of more unexpected Quantitative easing events from the world’s fiscal authorities. Specifically we know that the factor return for ERS can make major moves if the relative strength of the USD changes dramatically.
US & Global Market Summary
US Market: 4/10/20 - 4/16/20
Factor Update: Axioma US Equity Risk Model (AXUS4-MH)
Factor Update: Axioma Worldwide Equity Risk Model (AXWW4-MH)
Please let us know if you’d like to better understand and manage your exposure to Exchange Rate Sensitivity or any other factors that can affect your ability to successfully maneuver these choppy waters.