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Equity Risk Monitors — June 5, 2022

Equity Risk Monitor Highlights | Week Ended 2 June 2022

  • Growth continues to underperform in Developed Markets ex-US
  • US asset-asset correlations nearing two-year highs
  • Canada—the best performer and among least risky

Growth continues to underperform in Developed Markets ex-US

Although the decline in Growth stocks has slowed down in recent months, they are still among the worst performers, particularly in Developed Markets ex-US. The prospect of higher interest rates has soured investors on Growth stocks in general, and the style factor has plunged since September 2021. The Growth factor in Axioma’s Developed Markets ex-US medium-horizon fundamental model recorded the largest 12-month negative return (of -3%) among fundamental style factors, and this loss was two standard deviations lower than the expectations at the beginning of the period.

In contrast Growth rebounded somewhat in the US over the past month, and US Growth’s 12-month return was 2% as of last Thursday. What also worked in the US’s advantage was the fact that US Growth saw a much higher positive return prior to November 2021, and therefore the steep decline following the shift in sentiment, did not drag the style factor below the red line, as it did in the Developed Markets ex-US model.

Also notable: Growth is at the low end of its 12-month volatility range in the US, although the level is higher than it is outside the US, where the current reading is closer to the middle of the range.

See graph from the Developed Markets ex-US Equity Risk Monitor as of 2 June 2022:

US asset-asset correlations nearing two-year highs

Asset-asset correlations in the STOXX® USA 900 Index have climbed to levels not seen in nearly two years. The median pairwise realized 20-day correlation shot up in May and now exceeds 0.50. While the 20-day median has been oscillating, the 60-day median has been on the rise since the beginning of the year. Both 20-day and 60-day medians are approaching two-year highs. Higher asset correlations typically reflect concerns that economic and market events are driving stock prices, rather than companies’ individual characteristics, and also mean that it becomes more difficult to diversify a portfolio.

The decomposition of the change in risk from a stock-level perspective revealed that rising correlations contributed to the increase in the total risk of the STOXX® USA 900 Index last week to a higher degree than the increase in stock volatilities, as measured by Axioma’s US fundamental short-horizon model.

See graph from the United States Equity Risk Monitor as of 2 June 2022:

Canada—the best performer and among least risky

Canada remains the best performer among major regions tracked by Qontigo’s Equity Risk Monitors, fueled by the continuous rise in oil and gas prices. Energy contributed 6.5 percentage points to the STOXX® Canada 240 Index’s year-to-date return of 4.5%, with other Canadian sectors’ declines offsetting part of Energy’s positive contribution. While this level of return may not seem that high, the UK was the only other region to see a positive year-to-date return as of last week. In contrast, the US—the biggest loser so far this year —showed a 15.5% loss as of last Thursday.

Canada also remained among the least risky geographies, despite the spike in its risk over the past month. Market risk drove the rise in the medium-horizon total risk of the STOXX® Canada 240 Index, while industry risk also contributed to the increase, as measured by Axioma’s Canada fundamental risk model. Specific risk remained relatively flat, while style risk has fallen since the beginning of May.

See graph from the Canada Equity Risk Monitor as of 2 June 2022:

For more insights and research from the Applied Research team, please click here.