Equity Risk Monitors — February 22, 2021

Equity Risk Monitor Highlights | Week Ended February 18, 2021

Value finally picks up some steam; Exposure to Value lifts last year’s sector losers in the US; UK small-cap shares strongly outperform

Value finally picks up some steam

Value style investing is beginning to pick up after more than a decade of dismal performance. Having limped along since the summer of 2020, the Value style factor return began rising in November, after vaccine news boosted confidence in most markets. Value was up last week in all of Axioma’s medium-term fundamental models, and the style factor saw unusually high three-month returns (exceeding two-standard deviations of the expectation at the beginning of the period) in Developed Markets, Emerging Markets, Japan, and Asia-Pacific ex-Japan. In contrast, Value’s three-month return was -3% in China and flat for US Small Caps. Value in Asia-Pacific ex-Japan posted the highest three-month return (4%) among all regions, despite Value’s underperformance in China. It may be premature to declare the reemergence of Value as a source of alpha, but its current path looks better than it has for a long time.

See graph from the Global Developed Markets Equity Risk Monitor as of 18 February 2021:

Exposure to Value lifts last year’s sector losers in the US

Financials, Real Estate, and Energy—which were the biggest losers last year—are now among the best performers in 2021. The three sectors in the STOXX USA 900 had positive exposures to the Value style factor and therefore would be expected to perform well when Value does well. All other US sectors, except Utilities and Materials, had negative exposures to Value, as measured by the US medium-horizon fundamental model.

Still, the index weights of Financials, Real Estate, and Energy were well below their levels of one year ago. The contributions to benchmark risk of each of the three US sectors were higher than their respective weights would otherwise suggest. Nonetheless, Financials, Real Estate, and Energy combined contributed only about 15% to the index risk, less than half of Information Technology’s contribution.

See graph from the United States Equity Risk Monitor as of 18 February 2021:

UK small-cap shares strongly outperform

The Size factor in Axioma’s UK medium-horizon fundamental model has recorded large negative returns over the past one, three, six, and 12 months. That is, UK small capitalization stocks outperformed their large-cap counterparts in each of these periods. Size’s performance towered over the results (in absolute terms) of all other style factors in the UK model over each of these four horizons. Yet, with high expected volatility, the UK Size returns remained within the two standard deviation range we use to define “outsized” returns for all periods except the last 12 months.

UK Size’s 12-month return was -21% as of last Thursday, more than three standard deviations away from the volatility expectations of one year ago. Size posted negative returns in most other Axioma models, but the UK saw the largest negative one-year return among all regions. Developed Europe was a distant second, with a 12-month return for Size of 11%. In contrast, China and Japan saw large positive returns of 22% and 11%, respectively, indicating that large-cap stocks outperformed in those markets.

See graph from the UK Equity Risk Monitor as of 18 February 2021: