Equity Risk Monitors — February 28, 2022

Equity Risk Monitor Highlights | Week Ended February 24, 2022

  • Ukraine crisis drives up volatilities and correlations
  • Emerging Markets hit hardest
  • Russian and Ukrainian markets tank

Ukraine crisis drives up volatilities and correlations

Volatilities and correlations at individual country levels climbed last week as markets fell around the world following Russia’s attack on Ukraine. Not surprisingly, due to both their relative proximity to the conflict and their reliance on Russian gas, European countries saw some of the largest increases in both stock volatility and correlations. The Correlations Hotspots chart (see below) was littered with black upward arrows, indicating that correlations rose more than 2% in most European countries.

At an aggregate level, the STOXX® Europe 600 Index (which includes only developed European countries) fell nearly 6% last week, recording one of the largest increases in risk—almost 200 basis points—among all geographies Axioma models track closely. When analyzing the decomposition of the change in risk, higher stock volatility and higher stock correlations had a roughly equal impact on the rise in the European index risk, as measured by Axioma’s fundamental short-horizon model.

See graphs from the Equity Risk Monitors as of 24 February 2022:

Emerging Markets hit the hardest

The STOXX® Emerging Markets Index was one of the hardest hit indices last week, driven by the collapse of the Russian equity market. Although representing only about 4% of the STOXX® Emerging Markets Index at the beginning of last week, Russia was responsible for a third of the index’s weekly loss. The countries with the largest weights in the index—India (22%) and Taiwan (22%)—contributed 25% and 15%, respectively, to the index loss. However, all country equity markets in the Emerging index were down last week. The weekly index loss of 6.5% was more than three standard deviations larger than the expectations at the beginning of the week, as measured by Axioma Emerging Markets fundamental short-horizon model. Despite extensive warnings prior to the Russian attack, negative market returns and increased volatility suggest investors were surprised.

The STOXX® Emerging Markets Index saw the largest jump in riskabout 14%—last week among all regions Axioma Equity Fundamental short-horizon models track closely. Emerging Index’s forecasted risk of 16% is now at parity with that of STOXX® Europe 600, but remained below that of the STOXX® Asia Pacific ex-Japan and STOXX® Global 1800, both containing only developed markets.

See graph from the Emerging Markets Equity Risk Monitor as of 24 February 2022:

Russian and Ukrainian markets tank

Russia’s equity market fell nearly 50% last week, as sanctions were imposed on Russia following its invasion of Ukraine, while the Ukrainian market dropped 30%. Last week’s collapse of Russian and Ukrainian stocks wiped out all gains of the previous months, resulting in one-year losses of -30% and -16%, respectively, as of last Thursday.

Levels of volatility in Russia and Ukraine jumped 350 and 150 basis points, respectively, to around 30% for each. Only four months ago, Ukraine was much riskier than Russia, with a volatility forecast of 23%, five percentage points higher than that of Russia, as measured by Axioma Worldwide fundamental short-horizon model. The risk gap has since narrowed and, as of last Thursday, Ukraine’s risk was slightly lower than that of Russia.

Russia became not only the biggest loser, but also the third riskiest among major emerging markets, its risk surpassed only by that of Turkey and Brazil. Ukraine may have been spared some equity market decline and volatility increase because it is not part of major emerging market indices that sold off. (Ukraine is not represented on the chart below as it is a Frontier country, and only Developed and Emerging markets are shown on this chart.)

See graph from the Equity Risk Monitors as of 24 February 2022:

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