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Equity Risk Monitors — January 24, 2023

Equity Risk Monitor Highlights | Week Ended January 20, 2023

  • Individual developed market currency risk falls, but aggregate risk remains high
  • Momentum suffers while Value soars
  • Trading volume remains low, especially in Information Technology and Communications Services

Individual developed market currency risk falls, but aggregate risk remains high

A few weeks ago, in our year-end Equity Highlights review, we wrote “Aggregate currency risk (relative to USD) rose substantially throughout the year, and unlike the other factor risk blocks, it continued to increase throughout the second half, with a big jump in November. Most developed markets currency volatilities had backed off their 2022 highs by the end of the year, but they remained close to the high end of the range for the year as well as for the history of the model.”

In the short few weeks since then, most developed markets currencies have seen their risk retreat substantially, and it now stands much closer to the middle of their 12-month volatility ranges. JPY is the singular exception, with risk still at its 12-month high. The decline in risk accompanies the recovery in returns for many, and they now stand far above their maximum 12-month drawdown (even JPY).

Still, aggregate currency risk for the STOXX© Global 1800 index has leveled off and remains near a 12-month high. This suggests that developed market currencies remain highly correlated.

See graphs from the Global Developed Markets Equity Risk Monitor as of 20 January 2023:

Momentum suffers while Value soars

The market rotation we have experienced over the last several weeks, with recoveries in cyclical stocks relative to their more stable counterparts has also meant continued poor performance of the Medium-Term Momentum Factor.  Over the past month, the return to the factor was negative in all our major models and has been particularly so — more than two standard deviations below average — in the US and Europe. Indeed, the factor’s return has been negative for the last three, six and 12 months in the US, Japan and China, although other regions have seen much better Momentum performance over that period. This rotation also shows up in returns to Market Sensitivity and Volatility, which are positive for the last month, although negative in the other periods. Value has also been strong in most regions. Multi-factor managers may be experiencing some pain from this rotation in Momentum, where the shortfall has generally been of higher magnitude than the potential for pickup from a corresponding Value tilt.

See graph from the US Equity Risk Monitor as of 20 January 2023:

Trading volume remains low, especially in Information Technology and Communications Services

Average daily trading volume in US dollars for the STOXX Global 1800 index hit a 12-month low at the end of last week and is about 25% lower than it was a year earlier (much more than would be accounted for by the overall decline in the market). Volume is also about 22% lower than the average level for the past year.  The decline in developed markets volume seems to be led by the US, and the same calculation for the STOXX Global 1800 ex-USA index is only about 10% lower than a year ago. Emerging Markets volume is about 20% lower.

For the Global Developed Markets index, average volume at the end of last week was lower than the 12-month average in every sector, but the difference was starkest in Information Technology, where current volume is 30% below the 12-months average, and Communications Services, where it is more than 35% lower. Even volume for US Energy stocks is about 27% below average. The lower volume suggests that any given piece of news might lead to a bigger reaction by investors than it otherwise might have and is also a bit surprising given the recent market rotation. Perhaps it also implies that investors are not yet fully bought in to the “new leadership”.

See graphs from the Global Developed Markets Equity Risk Monitor as of 20 January 2023: