Equity Risk Monitors — January 18, 2022

Equity Risk Monitor Highlights | Week Ended January 13, 2022

  • US risk appetites ebb amid inflation worries
  • Dispersion widens globally
  • Hidden risks may linger in China

US risk appetites ebb amid inflation worries

Risk appetites ebbed as inflation worries intensified in the wake of the highest US inflation rate in 40 years. Returns to the US Market Sensitivity and Volatility style factors continued the downward trend started in November, indicating a further decline in risk appetites. That is, investors turned to low beta and low volatility stocks, shunning high beta and high volatility alternatives.

Three-month returns for both Market Sensitivity and Volatility exceeded -8%, but only Market Sensitivity’s return was more than two standard deviations below the expectations at the beginning of the period. Volatility’s three-month return remained within expectations, as measured by Axioma’s US fundamental medium-horizon model.

See graph from the United States Equity Risk Monitor as of 13 January 2022:

Dispersion widens globally

Asset return dispersion has widened in 2022 to levels not seen in almost a year. Asset return dispersion—the cross-sectional standard deviation of five-day returns—more than doubled from a couple of weeks ago (when the unusually low level was likely related to the trading lull between Christmas and New Year’s) and has been hovering around 5% for the STOXX Global 1800 Index so far this year. To keep things in perspective, however, the highest level of dispersion in recent history was observed at the beginning of the Covid crisis in March 2020 when dispersion surpassed 15%. The recent widening of asset dispersion indicates that the reward to “being right” on stock picks was higher than it has been in quite some time.

See graph from the Global Developed Markets Equity Risk Monitor as of 13 January 2022:

Hidden risks may linger in China

Despite becoming one the least risky countries, China may still be facing hidden risks. China’s risk (of 15%) was the fourth lowest after Australia, the UK and Canada, among short-horizon fundamental risk forecasts for all regions Axioma models track closely. As Chinese stocks fell last week, only the short-horizon fundamental forecast of Axioma’s China model rose, with the medium-horizon fundamental variant and the statistical variants at both short and medium horizons continuing to fall.

Although they have been shrinking since November, the risk spreads between the statistical and fundamental forecasts remained above one percentage point at both horizons. That is, extra risk was still being picked up by the statistical models, which may indicate potential changes in the risk regime and/or the emergence of non-traditional factor risk sources in the Chinese stock market.

See graph from the China Equity Risk Monitor as of 13 January 2022:

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