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Equity Risk Monitors — April 1, 2024

Equity Risk Monitor Highlight | Week Ended March 28, 2024

  • US predicted risk has leveled off, while in Developed ex-US it continues to fall 
  • Value has a strong March in developed markets; quarterly returns have had quite a run in several markets 
  • Trading volume: a study in contrasts 

US predicted risk has leveled off, while in Developed ex-US it continues to fall

Predicted volatility for the STOXX® US Index, as measured by Axioma’s short-horizon fundamental US model, bottomed out in the middle of March, and appears to be levelling off, especially when compared with risk of the STOXX® International Developed Markets Index (which includes all developed markets excluding the US) using the Axioma Developed Markets ex-US model. In DM ex-US, risk has fallen steadily almost without interruption. The continued decline in DM ex-US index risk means its predicted short-horizon risk is now below that of the US Index, after spending much of last year two to three percentage points above it. Although the magnitude of the difference is small, the lower risk forecast in DM ex-US may start to lure investors to broaden their geographic perspectives, especially if the gap continues to widen.   

In addition, for both indices the statistical model forecasts at both horizons remain above their fundamental counterparts, but that “risk spread” has narrowed substantially in the US. Last summer we were concerned about the gap that was driven largely by the then-Magnificent Seven, but the smaller current difference, probably driven by the broadening out of the market, is of less concern today.  

See graphs from the STOXX® World US (Left) and STOXX® International Developed Markets (Right) Equity Risk Monitors of 28 March 2024:

The following chart does not appear in the risk monitors, but is available on request:

Value has a strong March in developed markets; quarterly returns have had quite a run in several markets

The Value factor in the Axioma models (defined as book/price) had a very strong March in developed markets, where the risk-adjusted return was greater than 2 in US (All Cap), Canada, and Developed Markets ex-US. It was close to 2 in US Small Cap and Japan. In sharp contrast, the factor return was highly negative in Emerging Markets and Asia ex-Japan. Although the month saw a negative Value return in Emerging Markets, January’s was the highest monthly return since April 2021 for that region, so a slight pullback is to be expected.  

This performance represents a sharp reversal from February, when returns were highly negative in the US and Europe. In other major markets, Value’s return in February was negative but small in magnitude. Returns in January were positive in the major markets we track, and therefore the quarter was positive for the factor in most markets except Europe (where a positive March could not make up for the drawdown in February).  

Among major markets, only Europe has seen disappointing Value performance recently. Quarterly returns have been positive since Q4 2022 in the US, Japan and Developed Markets ex-US. In the US this represents the best run of positive quarters since 2012. In Developed ex-US 13 of the past 14 quarters have seen positive returns, and in Japan returns have been positive in 11 of the past 13 quarters. It appears that prior reports of Value’s death have been greatly exaggerated.  

The following charts do not appear in the risk monitors, but are available on request:

Trading volume: a study in contrasts

Average 20-day daily trading volume of the stocks in the STOXX® US index ended last week almost 30% higher than the level reached before Good Friday 2023. The market was up about the same amount during that period. After falling throughout the summer and early fall of 2023 US equities started to rise at the end of October, and the trajectory was almost straight up from that point. Volume remained fairly rangebound until February, when it started to rise, presumably drawing in new investors. Like the market, the increase in volume was highly concentrated in Information Technology. Volume in that sector rose 74%, while the return was about 50% (!), suggesting rotation out of other sectors or new participants coming into the sector. Info Tech volume also grew from 31% of total volume on average to 43% most recently, which contrasts with its 30% index weight.  

Another sharp contrast can be seen in Developed Markets ex-US vs. the US. The STOXX® International Developed Markets index has gained about 16% over the last year and trading volume has risen about 14%. The pattern has been similar to that of the US, with volume starting to increase much later than the market bottom. While Info Tech volume increased 37%, more than in any other sector, the increase is commensurate with the sector’s return. In addition, it represents only 16% of the overall index volume, both on average over the past year and in the most recent reading. Similar to the US, the proportion of volume is higher than index weight, which stands at less than 10%.  

Overall, the better diversification of sector weight and trading volume, along with slightly more muted Info Tech returns, may suggest better opportunity for investors outside the US should the tech trade start to lose its luster. And as mentioned earlier, if DM ex-US risk continues to fall below that of the US, there may be another case for non-US stocks to attract more attention.  

See graphs from the STOXX® World US and STOXX® International Developed Markets Equity Risk Monitors of 28 March 2024: