Equity Risk Monitors — January 5, 2021

Equity Risk Monitor Highlights | Week Ended December 31, 2020

Predicted risk remains high across the board; UK Equities among the biggest losers of 2020; Developed and Emerging Markets risk finish the year at parity

Happy New Year! Many thanks to all of our readers and best wishes for a healthy, prosperous and successful 2021!

Predicted risk remains high across the board

While the predicted volatility of major benchmarks has followed a downward trend since April—except for a small blip in November — it finished the year substantially higher than the unusually low level at which it started. Total predicted risk followed a similar pattern in most regions, as forecasted by Axioma’s local short-horizon fundamental models, with factor volatility driving the year-over-year increase in risk almost exclusively. A small increase in factor correlations—for which the contribution to the change in risk may have looked large in other periods—added to the total risk increase in 2020. When looking at the decomposition of the change in risk from the perspective of a dense matrix, higher stock volatility and stock correlations drove the increase in total risk.

See graph from the Global Developed Markets Equity Risk Monitor as of 31 December 2020:

UK Equities among the biggest losers of 2020

With uncertainty over the final Brexit deal swirling until the bitter end, the UK was one of the few developed markets to post a negative return for 2020, at the same time becoming the riskiest among all geographies Axioma models track closely. The STOXX UK 180’s cumulative yearly return dipped to -11% at the end of December. In contrast, the STOXX USA 900 and China A 900 posted 19% and 23% returns for the year, respectively. UK risk took the lead at the beginning of December and remained there until the end of the year, finishing at 21% as measured by Axioma’s UK short-horizon fundamental model. Japan and Canada ended the year as the least risky regions, with volatility levels slightly below 14%.

See graph from the UK Risk Monitor as of 31 December 2020:

Developed and Emerging Markets risk finish the year at parity

Both emerging and developed markets in aggregate finished 2020 in the black, with the STOXX Global 1800 recording an annual return of 14%, about 3 percentage points higher than that of the STOXX Emerging Markets 1500. Both indices saw sharp declines in risk, after the market downturn in the first quarter at the start of the pandemic. The ratio between the STOXX Emerging Markets 1500 and the STOXX Global 1800 short-horizon risk forecasts reached the highest level (1.5) in 2020 at the beginning of February, indicating that Emerging Markets were 50% riskier at that time. The ratio subsequently dropped dramatically and since April has hovered around one. Developed and Emerging Markets risk finished the year at parity, as measured by Axioma’s Worldwide and Emerging short-horizon fundamental models, respectively.

The chart below does not appear in our Equity Risk Monitors, but can be provided upon request: