Equity Risk Monitors — March 25, 2022

Equity Risk Monitor Highlights | Week Ended 24 March 2022

by Diana R. Baechle, PhD
  • US still shows highest risk, one month into the Russia-Ukraine war
  • Emerging and Developed Markets close the risk gap
  • Oil & Gas major exporter Canada sees among the highest returns

US still shows highest risk, one month into the Russia-Ukraine war

While Developed Europe and the UK saw the largest jumps in risk after February 22—when the Russian parliament authorized Putin to use military force outside the country—the US still leads in terms of risk level. The risk of the STOXX® Europe 600 Index rose from 15% to 21%, while that of the STOXX® UK 140 climbed from 11% to 16%, since the start of the armed conflict.

Still, the two European Indices lagged the risk of the STOXX® USA 900 Index, which started at 19% in late February and rose to 22% one month after the war’s inception. As of last Thursday, the US, Japan and Developed Europe were the riskiest among the 12 regions our Equity Risk Monitors track closely. The UK, despite its big climb in risk, remained the third least risky region after Canada and Australia.

See graph from the United States Equity Risk Monitor as of 24 March 2022:

Emerging and Developed Markets close the risk gap

The risk of the STOXX® Emerging Market 1500 Index rose more quickly than that of the STOXX® Global 1800 Index after Russia invaded Ukraine, and as a result the risk gap between the two indices has since narrowed sharply. After starting 2022 near parity, Developed Markets became increasingly riskier than Emerging Markets and, in the beginning of February, Developed Markets’ risk was 25% higher than that of their Emerging counterparts, a record in at least 16 years. This pattern is unusual, as Emerging Markets have been on average 20% riskier than Developed Markets over the past one and a half decades.

The risk gap between the two markets narrowed since February, with the ratio of the STOXX® Emerging Market 1500 Index to the STOXX® Global 1800 Index nearing one last week, as measured by Axioma’s fundamental short-horizon Emerging Markets and Worldwide risk models, respectively. For more details on the impact of the Russia-Ukraine war on Developed vs. Emerging markets, see our blog post The effects of the Russia-Ukraine crisis on equity markets in charts – Part 2: Developed vs. Emerging Markets.

The chart below does not appear in our Equity Risk Monitors, but can be provided upon request:

Oil & Gas major exporter Canada sees among the highest returns

While most major markets still posted year-to-date losses, Energy drove up the Canadian market, making it one of the best performers in 2022. Despite representing only about 16% of the STOXX® Canada 240 Index, Energy contributed more than half of the 8% year-to-date index return. Materials and Financials were the other two Canadian sectors that were major positive contributors. Materials—with a modest weight of about 13% in the index—had the second-largest positive contribution, followed by Financials—the largest sector in the index. Information Technology, Consumer Discretionary and Real Estate were the largest detractors from the Canadian index’s year-to-date return.

At the same time, Canada remained the least risky among major developed markets. Interestingly, Energy contributed about a third of the STOXX® Canada 240 Index risk—nearly double the sector’s weight in the index, implying that Energy stocks are far riskier than other Canadian names. Energy’s risk contribution exceeded even that of Financials, the sector that dominates the Canadian index with a weight approaching 35%. Materials is the only other sector in the index with the contribution to benchmark risk significantly higher than its weight.

See graph from the Canada Equity Risk Monitor as of 24 March 2022:

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