Equity Risk Monitors — February 16, 2021

Equity Risk Monitor Highlights | Week Ended February 11, 2021

High volatility stocks continue to outperform in developed markets; US Energy now the best performing sector, as oil prices rally; Norwegian krone strengthens but remains riskiest developed currency

High volatility stocks continue to outperform in developed markets

Amid the ongoing stock rally last week, investors flocked to high volatility names, indicating their higher appetite for risk has yet to abate. After remaining roughly flat from June through October, the Volatility factor has shot up since November in most of Axioma models covering developed markets. The factor saw outsized three-month returns (exceeding two-standard deviations of the expectation at the beginning of the period) in Axioma’s Worldwide, US, and Canada medium-horizon fundamental models.

Volatility returned 17% in Canada, 9% in the US and 6% in Global Developed Markets over the past three months. In the US, Volatility continued to climb to new highs last week, showing little impact from the recent tumbling of a handful of stocks popularized by retail investing. For more insights on the performance and risk of those US factors most affected by the frenzied retail trading, see our blog post Liquidity and Leverage raise red flags for portfolio risk amid retail trading surge.

Volatility’s return ran counter to long-term expectations. The performance of the Volatility factor is on average negative, meaning that lower volatility stocks generally outperform their higher volatility counterparts. Volatility’s risk was pushed toward the high end of its one-year volatility range in most models.

See graph from the Global Developed Markets Equity Risk Monitor as of 11 February 2021:

US Energy now the best performing sector, as oil prices rally

Fueled by the oil price rally, US Energy is now the best performer in 2021 among the 11 GICS sectors in the STOXX USA 900 index. US Energy gained 17% year-to-date, as oil prices climbed to highs not seen since before the pandemic, driven by strengthening global oil demand and tightening production. Energy’s risk has dropped considerably since the beginning of the year, but it remains by far the riskiest sector. The volatility of the second-riskiest sector—Consumer Discretionary—was 15 percentage points lower than that of Energy (38%), as measured by Axioma’s US short-horizon fundamental model.

That said, Energy is one of the smallest sectors in the STOXX USA 900, its weight in the index remaining below its level one year ago. Energy’s contribution to benchmark risk, although higher than its index weight, was well below 5% last week, and did not exceed its level of one year ago.

See graph from the United States Equity Risk Monitor as of 11 February 2021:

Norwegian krone strengthens but remains riskiest developed currency

The Norwegian krone advanced to fresh highs last week, buoyed by rising oil prices and the recovery of Norway’s energy-heavy economy. The krone suffered mightily during the market sell-off in March 2020, when demand slowed and oil prices plunged, becoming one of the weakest developed currency against the greenback. The US dollar, in turn, became a safe-haven currency, thus strengthening its position.

The krone showed the widest 1-year return range last week, from about -30% to +10%. The Norwegian currency is now at the top of that range, indicating a 10% 1-year return for the krone against the US dollar. The krone remains by far the riskiest among developed currencies, with 12% volatility, and is positioned in the middle of its 1-year volatility range against the greenback.

See graph from the Equity Risk Monitors as of 11 February 2021: