Equity Risk Monitors — August 9, 2021

Equity Risk Monitor Highlights | Week Ended August 5, 2021

  • Plummeting factor volatility continues to drive down worldwide risk
  • China’s industry risk at six-year high
  • Small caps post large gains in Canada

Plummeting factor volatility continues to drive down worldwide risk

Factor volatility continued to fall in past four weeks, pulling down worldwide market risk, despite concerns of a possible global economic slowdown due to the surge in coronavirus cases. Lower factor volatility has been leading the decline in the risk of the STOXX Global 1800 index over the past one-, three-, six-, and 12-months, as revealed by the decomposition of the change in risk from the perspective of Axioma’s Worldwide short-horizon fundamental model. The drop in risk was slightly offset by changes in the composition of the index, while changes in stock exposures generally abetted the decline.

Global stocks were up last week, adding to six straight months of gains at the end of July. The STOXX Global 1800 cumulative year-to-date return reached 14.5% last Thursday. At the same time, the current benchmark risk of 10% is about one quarter of the peak seen in April 2020, and is now approaching pre-pandemic levels.

See graph from the Global Developed Markets Equity Risk Monitor as of 5 August 2021:

China’s industry risk at six-year high

China’s industry risk rose last week, despite the rebound of the Chinese market. Industry risk in China has been ascending since March of this year, with the most current boost—resulting from increased government regulation of the technology and education sectors—pushing industry risk to levels not seen in six years.

The STOXX China A 900 index rebounded last week, but not enough to offset the prior week’s losses. The Chinese market recorded a year-to-date loss of 1% through last Thursday. Market risk drove China’s total risk down slightly over the past five business days, as measured by Axioma’s China medium-horizon fundamental model. Style risk contributed to the decline in total risk, somewhat offset by the increases in industry and specific risk.

See graph from the China Equity Risk Monitor as of 5 August 2021:

Small caps post large gains in Canada

The Size style factor in Axioma’s Canada medium-horizon fundamental model produced the highest absolute cumulative one-year return among all the fundamental style factors in the model. The return of nearly -18% was close to two standard deviations below the expectation of a year ago, as measured by the Canada model, indicating that small capitalization stocks substantially outperformed their larger counterparts during this period. Small caps fared well in most geographies Axioma models track closely, with Size recording negative 12-month returns in all local models except Japan, China, and Developed Markets ex-US.

Size in Canada was positioned at the low end of its one-year volatility range last week. However, Size was the second riskiest after Volatility among all other style factors in the Canada model.

See graph from the Canada Equity Risk Monitor as of 5 August 2021:

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