Equity Risk Monitors — February 6, 2022

Equity Risk Monitor Highlights | Week Ended February 3, 2022

  • Factor volatility continues to drive global risk
  • US Info Tech’s style factor exposures explain its underperformance
  • Asset diversification plummets, as trading volume soars in the US

Factor volatility continues to drive global risk

Factor volatility once again drove the rise in global risk last week, even as major markets posted weekly gains. The decomposition of the change in risk from a factor model perspective revealed that higher factor volatility was mainly behind the increase in the STOXX® Global 1800 Index’s risk, with the change in stock characteristics adding to the total risk increase last week. Factor volatility also rose over the past month, three months, six months and one year.

When analyzing the decomposition of risk from the stock-level vantage point, higher stock volatility and higher stock correlations had a roughly equal impact on the rise in benchmark risk, as measured by Axioma’s fundamental short-horizon model.

See graphs from the Global Developed Markets Equity Risk Monitor as of 3 February 2022:

US Info Tech’s factor exposures explain its underperformance

Higher interest rates soured investors on Growth stocks in general. Info Tech (which also had some well publicized stock specific issues) bore the brunt of that the shift in outlook, falling 10% year to date and underperforming the STOXX® USA 900 Index by about 4%. Style factor attribution using Axioma’s US fundamental model showed that Info Tech’s high exposures to Growth, Momentum and Market Sensitivity all contributed to the active loss.

It wasn’t just what Info Tech had, but what it didn’t have, that contributed. Among the 11 sectors in the STOXX® USA 900 Index, Info Tech exhibited some of the largest negative style factor exposures to factors showing the biggest gains so far this year: Value and Earnings Yield. The tech sector benefited only from its positive exposures to Size and Profitability and negative exposure to Volatility, but not enough to offset the active losses contributed by the other factors.

See graph from the United States Equity Risk Monitor as of 3 February 2022:

Asset diversification plummets, as trading volume soars in the US

Asset diversification plummeted in the US, as trading activity reached at least a 12-month high last week. After peaking in December, asset diversification in the STOXX® USA 900 Index fell this year to levels not seen since April 2021. This indicates that portfolio managers were in the worst position to diversify their portfolios in 10 months. The asset diversification ratio is calculated as the weighted average asset variance for each stock in the index, divided by the total forecasted index variance, and measures the impact of correlations on total risk. Trading activity for the stocks in the US index has surged since mid-January, with the average daily trading volume exceeding $400 million last week, a level not seen in at least a year.

See graphs from the United States Equity Risk Monitor as of 3 February 2022:

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