Equity Risk Monitors — January 19, 2021

Equity Risk Monitor Highlights | Week Ended January 14, 2021

Risk appetites keep rising; Emerging markets industry risk at 12-month high; US market wobbles as risk remains relatively flat

Risk appetites keep rising

High-beta and high-volatility stocks have had a tremendous run since the end of the market downturn early last year, and in the last couple of months they took it up a few of notches more. The recent spikes in Market Sensitivity and Volatility turned the two factors into the top performers, with the highest 12-month returns by far, among all style factors in Axioma’s Worldwide medium-horizon fundamental model. What’s more, the two recorded their highest and second-highest annual returns in 2020, respectively, in the history of the two models. That is, investors preferred high beta stocks, i.e., those with positive exposures to Market Sensitivity, and high volatility stocks, i.e., those with positive exposure to Volatility, to low-beta and low-volatility alternatives, indicating a higher appetite for risk.

Market Sensitivity remained the riskiest style factor in the Worldwide model, while Volatility was in fourth place after Momentum and Size. However, Market Sensitivity was located in the middle of its 12-month volatility range, while Volatility was close to the high-end of its range as of last Thursday.

See graph from the Global Developed Markets Equity Risk Monitor as of 14 January 2021:

Emerging markets industry risk at 12-month high

Emerging Markets total risk followed a generally descending trend since April, but the STOXX Emerging Markets 1500’s industry and specific risk both rose over the past 12 months. A closer look at the major components of risk revealed that market risk drove the decline in total risk for the index over the past nine months, while style, country and currency risk deepened the fall-off. In contrast, industry risk reached at least a 12-month high last week, and so did stock-specific risk, as measured by Axioma’s Emerging Markets medium-horizon fundamental model. While specific risk is only a small part of total benchmark risk, it may figure more prominently in actively managed portfolios.

See graph from the Emerging Markets Equity Risk Monitor as of 14 January 2021:

US market wobbles as risk remains relatively flat

After ending the first week of 2021 at record levels, the US market rose in the beginning of last week only to retreat towards the end of the week, dragged down by ongoing uncertainty related to the pandemic and vaccine rollouts, a disappointing jobs report, and weakness in technology and social media companies. The STOXX USA 900 index reported a zero five-day return by Thursday. After rising slightly in the beginning of the week, risk then fell and the US index saw no change in risk for the week, as measured by Axioma’s US short-horizon fundamental model.

See graph from the United States Equity Risk Monitor as of 14 January 2021: