Equity Risk Monitors — April 12, 2021

Equity Risk Monitor Highlights | Week Ended April 8, 2021

  • Global country and style risk remain elevated
  • Asset diversification plunges in the US
  • Turkish lira’s risk surges

Global country and style risk remain elevated

While equity markets around the globe kept rising, the total risk of the STOXX Global 1800 index ebbed last week, after a month of steady increases, led by market risk. A look at the major components of risk in the index showed that both style and country risk declined last week, as measured by Axioma’s Worldwide medium-horizon fundamental model. That said, style risk has more than doubled since last October and is now at levels not seen in at least a decade. Country risk has also climbed after reaching a near-term low at the end of February, but remains far below the peaks seen in the summer of last year. In contrast, industry and specific risk were slightly up, while currency risk remained flat last week.

See graph from the Global Developed Markets Equity Risk Monitor as of 8 April 2021:

Asset diversification plunges in the US

After rising to 12-month highs in February-March of this year, asset diversification in both the STOXX USA 900 and the Russell 2000 indices has since plunged. This indicates that portfolio managers are now more limited in their ability to diversify their portfolios. Diversification is measured as the ratio of the weighted average asset variance to total index variance, as measured by Axioma’s US All Cap (US4) and Small Cap (USSC) medium-horizon fundamental models, for the STOXX USA 900 and Russell 2000 indices, respectively. Asset diversification fell more in the small cap index than in the large cap index, although both ratios remain much higher than the levels seen immediately after the market downturn last year.

See graph from the United States Equity Risk Monitor as of 8 April 2021:

See graph from the US Small Cap Equity Risk Monitor as of 8 April 2021:

Turkish lira’s risk surges

The Turkish lira has plummeted against the US dollar, driven by both the unexpected change in leadership of Turkey’s Central Bank in March and increased concerns for higher inflation in Turkey. The lira is the only major emerging currency to incur a loss against the US dollar over the past 12 months. At the same time, the lira’s volatility rose sharply, pushing the Turkish currency to the high end of its one-year volatility range against the greenback last week.

The lira started the year as the riskiest emerging market currency, but as its volatility rose above 20%, it pulled away from the South African rand—the second riskiest emerging currency—which is now more than five percentage points less risky that the lira. All other major developed currencies were positioned at or near the low ends of their one-year volatility ranges against the US dollar last Thursday, as measured by Axioma’s Worldwide short-horizon fundamental model.

See graph from the Emerging Markets Equity Risk Monitor as of 8 April 2021:

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