Equity Risk Monitors — February 11, 2022

Equity Risk Monitor Highlights | Week Ended February 10, 2022

  • US Financials’ returns join Energy’s in positive territory
  • The UK and Canada lead in returns
  • Value style factor return surges

US Financials’ returns join Energy’s in positive territory

US Financial stocks were lifted by the prospect of aggressive interest-rate hikes by the Fed to combat inflation. Financials’ 3% weekly gain pushed the year-to-date return into positive territory. Among the 11 sectors in the STOXX® USA 900 Index, Financials and Energy were the only two US sectors posting gains so far this year. Still, Energy’s 2022 gains dwarfed those of Financials. Energy’s year-to-date cumulative return of 23% was 20 percentage points higher than that of Financials as of last Thursday.

That said, the weights of Energy and Financials in the US index are small at 3% and 12%, respectively. And the contributions of Energy and Financials to the STOXX® USA 900 Index risk were less than their weights would otherwise indicate (unlike last year when the two sectors contributed more to benchmark risk than their respective index weights).

In contrast, Information Technology—one of the biggest losers this year—represents nearly a third of the US market. Info Tech’s index risk contribution of 37% last week was eight percentage points higher than its weight. For details on the possible effects of a collapse of the tech sector on the US market—and the similarities to the bursting of the dot-com bubble—see our blog post Another tech bubble could be about to burst—and it could be worse.

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

The UK and Canada lead in returns

As financial and energy stocks made strides this year, the UK and Canada reported the largest gains and lowest volatility among major markets that Axioma’s equity models follow closely. While the US, China and Japan have suffered losses of 3% to 6% so far in 2022, the UK and Canada have experienced year-to-date cumulative gains of 3% and 4%, respectively.

Both the Financials and Energy sectors impacted Canada and the UK positively. Financials is the largest sector in both Canada and the UK, representing about 35% and 20% of the STOXX® Canada 240 and STOXX® UK 180 indices, respectively, and drove gains in each country. With a 15% weight in the Canadian index, Energy also contributed significantly to Canada’s success, while it had a smaller, but still positive effect in the UK, where its weight was less than 5%. At the same time, since the end of January 2022, the UK and Canada have been the least risky of all regions that Axioma’s fundamental short-horizon models follow closely.

See graph from the Canada Equity Risk Monitor as of 10 February 2022:

See graph from the United Kingdom Equity Risk Monitor as of 10 February 2022:

Value style factor return surges

The Value style factor continued to climb last week, maintaining the upward trend observed for value style investing over the past 12 months. Value posted one-, three-, six- and 12-month outsized returns—more than two standard deviations away from the expectations at the beginning of each period, as measured by Axioma’s Worldwide medium-horizon fundamental model. Value’s 7% gain was not only high relative to its own history, it was also the largest positive return among all factors in the Worldwide model. Value has also been thriving over the past 12 months in all other regions Axioma’s models track closely.

See graph from the Global Developed Markets Equity Risk Monitor as of 10 February 2022:

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