Equity Risk Monitor Highlights | Week Ended January 27, 2022

• Volatilities and correlations climb as markets fall
• Russia and Ukraine risks rise and converge
• Australia takes a hit

Volatilities and correlations climb as markets fall

Volatilities and correlations at individual country levels climbed last week, particularly in European countries, as markets fell around the world, driven by rising concerns over the conflict between Russia and Ukraine and the Fed’s announcement of a rate hike in March. Global Volatility and Correlations Hotspots charts (see below) were peppered with black upward arrows, indicating that volatilities rose at least 1%, while correlations rose more than 2% in most European countries, the US, China and Australia last week.

At an aggregate level, the STOXX® Global 1800 Index fell more than 4% last week. The risk for the global index rose another 100 basis points over the past five business days, after climbing 140 basis points last week, and is now approaching 16%, as indicated by the Axioma Worldwide fundamental short-horizon model.

See graphs from the Equity Risk Monitors as of 27 January 2022:

Russia and Ukraine risks rise and converge

The risk of both Russia and Ukraine jumped as the conflict between them intensified. Over the past couple weeks, risk has jumped for both Russia and Ukraine, after being on an ascending trend since September 2021. Both Russia and Ukraine saw their equity markets continue to fall last week, contributing to a total one-month loss of 9% and 5%, respectively. However, 12-month returns remained strongly positive for both.

Russia’s and Ukraine’s levels of volatility converged recently. Only four months ago, Ukraine was much riskier than Russia, with a volatility forecast of 23%, five percentage points higher than that of Russia, as measured by Axioma Worldwide fundamental short-horizon model. The risk gap has since narrowed, and as of last Thursday, Ukraine’s risk of 27.5% was only about one percentage point higher than that of Russia. Russia became the fifth riskiest among major emerging markets, surpassed only by Turkey and three Latin American  countries. (Ukraine is not represented on the chart below as it is a Frontier country, and only Developed and Emerging markets are represented on this chart.)

See graph from the Equity Risk Monitors as of 27 January 2022:

Australia takes a hit

Australia suffered one of the week’s biggest losses and is no longer the least risky among the regions Axioma models track closely. The STOXX® Australia 150’s weekly loss of nearly 7% was more than four standard deviations away from the expectation at the beginning of the week, as measured by Axioma Australia short-horizon fundamental model.

Australia started 2022 as the least risky region, but last week’s spike in risk of about four percentage points (from 10% to 14%) placed Australia somewhere in the middle of the pack among major indices in terms of risk. No markets were spared last week, as all saw increases in risk of at least 4%, with the UK, China, Europe, and Asia-Pacific ex-Japan all showing surges in the low double digits (11%-14%). Australia posted the biggest risk increase at 37%.

See graph from the Australia Equity Risk Monitor as of 27 January 2022:

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