Equity Risk Monitors — May 27, 2022

Equity Risk Monitor Highlights | Week Ended 26 May 2022

  • Industry risk triples for US small caps
  • Momentum correlations flip
  • Trading activity in Emerging Markets plunges

Industry risk triples for US small caps

Industry risk shot up for US small capitalization stocks, while it remained relatively flat for their larger counterparts so far this year.  Of course, market risk was the main driver of the total risk increase for both US small and large caps in 2022. However, although it represents a smaller part of total benchmark risk, industry risk—which has tripled for the Russell 2000® since the beginning of the year—contributed much more to the total risk of the Russell 2000®, than it did for the STOXX® USA 900 Index. The total risk of the Russell 2000® is now four percentage points higher than that of the STOXX® USA 900 Index, as measured by Axioma’s US All Cap (US4) and US Small Cap (USSC4) fundamental medium-horizon models, respectively.

The weight of the Consumer Discretionary sector in the Russell 2000® Index plunged, as did its contribution to benchmark risk over the past 12 months. Consumer Discretionary’ s weight in the Russell 2000® Index shrunk from about 15% a year ago to 10% last week, as rising inflation has created concerns about consumer spending, especially on the big-tickets items represented in the sector. In contrast, Energy’s weight and risk more than doubled in the small cap index. Large-cap Consumer Discretionary stocks lost some capitalization weight versus a year ago, while risk remained steady. The comparison of this pattern between the two US market segments may reflect concerns that inflation will impact small caps much more than large caps.

See graphs from the United States Small Cap Equity Risk Monitor as of 26 May 2022:

Momentum correlations flip

The large swings in style factor returns also meant big changes in factor correlations. The Momentum style factor in Axioma’s Worldwide medium-horizon fundamental model has seen some of the largest changes in correlations over the past year.

Momentum became much less negatively correlated with Value, Earnings Yield and Profitability. Growth and Momentum, although still positively correlated, are much less so than a year ago. Investors tilting their portfolios on multiple style factors may see a big and perhaps unexpected impact on their portfolio risk due to these changing factor correlations.

See graphs from the Global Developed Markets Equity Risk Monitor as of 26 May 2022. Note that the first chart shows the change in correlation, while the second highlights the current level:

Trading activity in Emerging Markets plunges

Trading activity in the STOXX® Emerging Markets 1500 Index has been plunging since April, falling to a 12-month low. The average daily trading volume in Emerging Markets followed a downward trend over the past year, dipping below $32 billion last week. In contrast, although oscillating wildly, trading activity in the STOXX® Global 1800 index trended upward over the same period.

Current trading volumes for all sectors in the STOXX® Emerging Markets 1500 Index were below their 12-month averages. Information Technology and Industrials saw the largest declines in trading volumes over the past year.

See graphs from the Emerging Markets Equity Risk Monitor as of 26 May 2022:

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