Equity Risk Monitors — December 7, 2020

Equity Risk Monitor Highlights | Week Ended December 3, 2020

Asset diversification at new high since March; US investors gain confidence in dividend yields; China comes out on top, as its risk continues to slide

Asset diversification at new high since March

Asset diversification reached a new high since the market downturn in most regions Axioma models track closely, as stocks extended their November rally into last week. Investor optimism was lifted by the prospect of an acceleration of the market recovery on the heels of multiple Covid-19 vaccine announcements, signs of bipartisan progress toward a US coronavirus relief package, and the Fed’s commitment to provide stimulus. The asset diversification ratio is calculated as the weighted average asset variance for each stock in the index, divided by the total forecasted index variance, and measures the impact of correlations on total risk. The high asset diversification indicates that portfolio managers were in the best position to diversify their portfolios since March, although the level remains well below the peak reached prior to the market meltdown.

See graph from the United States Equity Risk Monitor as of 3 December 2020:

US investors gain confidence in dividend yields

After a dismal performance earlier in the year, when investors seemed to have abandoned hopes for companies’ ability to pay dividends, the US Dividend Yield style factor saw a strong reversal in November, which continued last week. US Dividend Yield’s November return was among the highest 10% in the almost 40-year history of Axioma’s US medium-horizon fundamental model. As of last Thursday, the one-, three- and six-month returns were all positive, although earlier losses were not completely covered, and the 12-month return for Dividend Yield was still strongly negative. Dividend Yield was not alone in experiencing these extreme returns in November among US style factors. For more information on the unusual performance of US style factors in November, see blog post Factor Returns in November Mean Another Month in 2020 to Remember.

See graph from the United States Equity Risk Monitor as of 3 December 2020:

China Equity Market comes out on top, as its risk continues to slide

China’s market continued to rise last week, boosted by news that Chinese manufacturing reached its highest level in a decade in November. While the world’s second largest economy was the first impacted by the pandemic earlier this year, the Chinese market rebounded strongly. The STOXX-China-A-900 index recorded a year-to-date return of 22%, while the STOXX-USA-900 lagged at 16%, the STOXX Global 1800 returned 11%, and the STOXX-Europe-600 was still in the red for the year.

At the same time, China’s predicted risk has been on a downward trend since August, as measured by Axioma’s China short-horizon fundamental model. Only a month ago, China was the riskiest among the geographies Axioma models track closely. At 19% volatility, China was somewhere in the middle of the pack on Thursday of last week.

See graph from the China Equity Risk Monitor as of 3 December 2020: