Equity Risk Monitors — February 22, 2022

Equity Risk Monitor Highlights | Week Ended February 17, 2022

  • US style risk falling in 2022
  • Short- vs medium-horizon global risk predictions widen
  • The US dollar strengthens

US style risk falling in 2022

Despite the recent large swings in style factor returns, US style risk has been declining in February 2022. While style risk was flat last week, US top-line risk continued to rise, as the US market suffered another weekly loss, as the likelihood of tighter monetary policies and as geopolitical tensions intensified. The medium-horizon risk for the STOXX® USA 900 Index advanced 40 basis points over the past five days, for a total of 260 basis points year to date, bringing the US index risk up to 17%, as measured by Axioma’s US medium-horizon fundamental model.

A look at the major components of risk shows that while market risk was the main driver of the risk increase this year, industry and stock-specific risks (which represent a smaller part of total benchmark risk) rose, too, but only slightly. In contrast, style risk declined steeply in February, dipping below its level at the beginning of the year. Half of the style factors in the US models are now positioned at the low ends of their one-year volatility ranges, while Earnings Yield, Growth, and Market Sensitivity are at the peaks of their respective ranges.

See graph from the United States Equity Risk Monitor as of 17 February 2022:

Short- vs medium-horizon global risk predictions widen

The risk spreads between the short- and medium-horizon risk forecasts for the STOXX® Global 1800 Index of both fundamental and statistical variants of Axioma’s Worldwide equity risk model turned positive this year, rising to levels not seen since the summer of 2020. This suggests a continued upward trend in medium-horizon risk in the near-term.

The short-horizon fundamental variant climbed nearly 300 basis points to 16.5% year to date, while its medium-horizon counterpart rose about 150 basis points to 15.5% over the same period, resulting in a one percentage point spread between the two forecasts. Similarly, the statistical short-horizon risk forecast rose more than the medium-horizon one in 2022, the spread between them widening to one percentage point.

See graph from the Global Developed Markets Equity Risk Monitor as of 17 February 2022:

The US dollar strengthens

The US dollar strengthened over the past 12 months, as the greenback maintained its safe haven status amid mounting economic and political risk. Expected higher interest rates also benefitted the greenback. Major developed market currencies were all positioned at or near the low ends of their one-year return ranges against the US dollar last week. All saw one-year losses, with the Canadian dollar being the only major developed currency to show a modest one-year gain.

The Canadian dollar was positioned near the high end of its one-year volatility range against the greenback, while most other developed currencies stayed at the mid or low ends of their respective risk ranges. The Singapore dollar remained the least risky currency, the Norwegian krone was the riskiest  developed currency, and the Canadian dollar was somewhere in the middle of the pack.

See graph from the Equity Risk Monitors as of 17 February 2022:

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