Equity Risk Monitors — April 19, 2021

Equity Risk Monitor Highlights | Week Ended April 15, 2021

  • Upswing in Energy, Financials, Real Estate and Utilities strengthens Value and Dividend Yield
  • Correlations tank in both global and emerging markets
  • Chinese stocks buck the global trend, continuing to fall

Upswing in Energy, Financials, Real Estate and Utilities strengthens Value and Dividend Yield

The recent rise in Energy, Financials, Real Estate and Utilities has boosted Value and Divided Yield. The four global sectors exhibited the largest exposures to the two style factors in the Axioma Worldwide medium-horizon fundamental model. Financials has been the second-best performer after Energy in 2021 and showed the highest exposure to Value (0.85) among the 11 GICS sectors in the STOXX Global 1800 index. Energy has been the best performer by far this year, with the biggest exposure to Dividend Yield (2.05) and the second largest exposure to Value (0.72).

Financials was the second largest sector in the global market and was responsible for nearly a quarter of the STOXX Global 1800 year-to-date return of 9.6%. Energy’s weight in the global index was less than 3% and therefore had a marginal contribution to the index’s gain this year. The combined weights of Energy, Financials, Real Estate and Utilities—which totaled 21.8%—was still marginally lower than Information Technology’s 21.9% weight in the STOXX Global 1800 index. The dominance of Info Tech in the global market, and the tech sector’s continued success, resulted in Info Tech having the second-largest contribution to the global index’s 2021 gain, after Financials, as of last week.

See graphs from the Global Developed Markets Equity Risk Monitor as of 15 April 2021:

Correlations tank in both global and emerging markets

Asset correlations have plummeted in both global and emerging markets in recent weeks. Lower asset correlations typically indicate that companies’ individual characteristics are driving stock prices, rather than concerns about macroeconomic events. The median pairwise realized 20-day correlation in the STOXX Global 1800 index and STOXX Emerging 1500 index dipped to about 0.05 last week, almost eight-fold lower than the highs seen for each index in July and April of last year, respectively, when the 20-day median was around 0.40. The 60-day median pairwise asset correlation has stabilized at around 0.10 for the global index and slightly below 0.10 in the emerging markets index over the past couple of months, but will likely follow in the footsteps of its shorter-term counterpart in a few weeks.

See graphs from the Global Developed Markets Equity Risk Monitor as of 15 April 2021:

See graph from the Emerging Markets Equity Risk Monitor as of 15 April 2021:

Chinese stocks buck the global trend, continuing to fall

Chinese stocks tumbled as most other major equity markets posted substantial gains last week. The STOXX China A 900 index was down almost 3% over the past five business days, adding to the overall losses for past three months, which are now close to 14%. While the weekly loss remained within one standard deviation of the expectation five days ago, the three-month loss has far exceeded one standard deviation of the expectation at the beginning of the period.

After reaching a 12-month low in Dec. 2020, China’s risk surged nearly seven percentage points, rising close to five percentage points in the last three months alone. In contrast to its low-risk profile a year ago, China became the riskiest of all regions Axioma models track closely, with STOXX China A 900’s  predicted risk rising above 23% last Thursday, as measured by Axioma China fundamental short-horizon model.

See graphs from the China Equity Risk Monitor as of 15 April 2021:

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