Equity Risk Monitors — June 27, 2022

Equity Risk Monitor Highlights | Week Ended 23 June 2022

  • Global Value’s winning streak rolls on
  • Asset diversification continues to plunge
  • Investors flock to US dollar’s safety

Global Value’s winning streak rolls on

Despite remaining relatively flat in June, Value is still the best performer among the fundamental style factors in Axioma’s Worldwide medium-horizon fundamental model. Value has been on an upward trend over the past year, recording positive one-, three-, six- and 12-month returns.

However, performance was slow and steady—only the six-month return was higher than expected: more than two standard deviations above the volatility expectation at the beginning of the period. Slow and steady also means that Value is now positioned at the low end of its one-year volatility range.

See graph from the Global Developed Markets Equity Risk Monitor of 23 June 2022:

Asset diversification continues to plunge

Asset diversification continued to plunge globally, dipping to a one-and-a-half-year low last week. That is, managers of equity portfolios were in the worst position to diversify their portfolios since the end of 2020. After reaching a near-term high in November of 2021 when it exceeded 5.0, the asset diversification ratio in the STOXX® Global 1800 Index plummeted to almost 2.5 last week, as measured by Axioma’s Worldwide median-horizon fundamental model.

The asset-diversification ratio is calculated as the weighted average asset variance for each stock in the index, divided by the total forecasted index variance, and measures the impact of correlations on total risk. A diversification ratio of 1.0 would indicate a perfect positive correlation among the stocks in the index, which is improbable for a large index such as the STOXX® Global 1800 Index. But it is alarming that the diversification ratio for the global index has dropped into the bottom quintile relative to its 10-year range.

See graph from the Global Developed Markets Equity Risk Monitor as of 23 June 2022:

Investors flock to US dollar’s safety

The US dollar has strengthened against major developed currencies, as investors flocked to the safety of the greenback. Expected higher interest rates also benefitted the US currency. The US Federal Reserve Chairman doubled down last week on the Fed’s intention to aggressively raise rates to tame inflation, despite the threat of a recession.

By the end of last week, most developed currencies were positioned at or near the low-ends of their one-year return ranges against the US dollar, and all exhibited one-year losses. Risk has climbed for all developed market currencies, pushing them to the high-ends of their one-year volatility ranges against the US dollar. Managers making currency bets should take notice, and make sure the expected active return is still commensurate with the added risk.

See graph from the Equity Risk Monitors as of 23 June 2022:

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