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January 30, 2024

Equity Risk Monitor Highlights | Week Ended January 26, 2024

  • China’s risk spikes in 2024
  • US market return remains within expectations
  • Europe outperforms as ECB keeps rates steady

China’s risk spikes in 2024 

China’s risk climbed steeply in 2024, and it is now 20% higher than it was at December end, as measured by Axioma’s China fundamental short-horizon model. The short-horizon risk for the STOXX China A 900 index rose nearly 200 basis points over the past five business days, despite the Chinese market rising last week. The forecasted risk for STOXX China A 900 index is now on par with that of STOXX Japan, becoming the second-riskiest indices after STOXX Asia-Pacific ex-Japan, among all major indices tracked by the Equity Risk Monitors. 

However, Japan is the best performer while China (entering the third year of decline) is one of the biggest losers among all geographies covered by the Equity Risk Monitors. This is despite the Chinese market rising last week following speculations that the government is planning a stimulus package. Investors favored cheap, liquid and large Chinese companies with momentum, as reflected by the strong positive weekly returns of the Value, Liquidity, Size and Momentum style factors. Value and Liquidity’s five-day returns were three standard deviations higher than expected at the beginning of the week, based on Axioma’s China fundamental medium-horizon model. At the same time, investors moved away from high-beta, high-volatility, and growth stocks. 

See graphs from the STOXX China A 900 Equity Risk Monitor of 26 January 2024: 

US market weekly return remains within expectations 

The US market return stayed within anticipated levels, despite several US major indices setting fresh records last week. Indices were pushed up by news of strong economic data, with inflation falling from historic highs and the Fed signaling a potential interest rate drop.  

Both STOXX US and STOXX US Small Cap indices rose about 1%, but their weekly gains remained within one standard deviation of the expectations at the beginning of the week, as measured by Axioma’s US All Cap and US Small Cap fundamental short-horizon equity models, respectively. In contrast, the three month-return for both indices was two standard deviations higher than the expectations in the beginning of October, when volatility was below the long-term median. 

US stocks got off to a bumpy start of 2024 before the sharp rebound last week. While the STOXX US index recorded a positive year-to-date return, the STOXX US Small Cap index remained in negative territory so far this year. At the same time, the risk of large caps declined while that of small cap was flat last week, with the STOXX Small Cap index being 60% riskier than the STOXX US index as of last Friday. 

See graph from the STOXX US Equity Risk Monitor as of 26 January 2024: 

See graph from the STOXX US Small Cap Equity Risk Monitor as of 26 January 2024: 

Europe outperforms as ECB keeps rates steady 

While US indices took the spotlight, the European market outperformed the US market last week, as the European Central Banks kept interest rates steady and opened the possibility for a cut this spring. The STOXX Europe 600 index outpaced the STOXX US index by more than 200 basis points, climbing 3% last week. Europe’s weekly gain was more than two standard deviations higher than expected at the beginning of the week, as measured by Axioma’s Europe fundamental short-horizon model. 

The rise of the European market was driven by gains in Consumer Discretionary and Information Technology stocks, although all European sectors were up last week except Utilities (which represent less than 5% of the European market). Similar to other markets, the European market has been experiencing a narrow breadth, with less than 50% of stocks in the STOXX Europe 600 index beating the index last week. 

See graphs from the STOXX Europe 600 Equity Risk Monitor of 26 January 2024: