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Equity Risk Monitors — January 10, 2023

Equity Risk Monitor Highlights | Week Ended January 6, 2023

  • Europe reports best start of the year
  • Asset-asset correlations plummet in Emerging Markets
  • Russia and Brazil’s risks converge

Europe reports best start of the year

Most equity markets closed the first week of 2023 in positive territory, with Europe leading the way. The STOXX Europe 600 Index’s weekly gain of nearly 5% was the largest among all regions closely monitored by the Equity Risk Monitors. Europe’s return was above one standard deviation of the expectations at the beginning of the week, as measured by Axioma’s Europe short-horizon fundamental risk model.

At the same time, Europe’s forecasted risk of 17% placed it in the middle of the pack among these geographies. With 22% forecasted volatility, the US remained the riskiest, while UK (11%) the least risky region, as revealed by Axioma’s US and UK short-horizon fundamental risk models, respectively.

See graph from the Europe Equity Risk Monitor of 6 January 2023:

Asset-asset correlations plummet in Emerging Markets

Asset correlations have plummeted in Emerging Markets in recent weeks. Lower asset correlations typically indicate that companies’ individual characteristics are driving stock prices, rather than concerns about macroeconomic events. The median pairwise realized 20-day correlation in the STOXX Emerging 1500 index dipped to 0.05, almost four-fold lower than the high seen in October of last year, when the 20-day median was above 0.20. The 60-day median pairwise asset correlation also fell near 0.05.

This is a different trend than the one seen in Developed Markets, where the 20-day median pairwise asset correlation has been rising over the past three weeks. The 60-day median pairwise asset correlation in the STOXX Global 1800 index fell over the same period, but will likely follow in the footsteps of its shorter-term counterpart in a few weeks.

See graph from the Emerging Markets Equity Risk Monitor as of 6 January 2023:

See graph from the Global Developed Markets Equity Risk Monitor as of 6 January 2023:

Russia and Brazil’s risks converge

Brazil’s and Russia’s levels of volatility converged recently, as political unrest intensified in Brazil. Only three months ago, Brazil’s risk of 35% was nearly half that of Russia. The risk gap has narrowed from 25 percentage points on September 30, 2022, to 2 percentage points last Friday. Brazil’s risk rose 8 percentage points (to 42%) since the 2022 Brazilian election in early October, while Russia’s risk fell 15 percentage points over the same period, reaching 44% last Friday.

Brazil is now the second riskiest after Russia among major emerging markets, as measured by Axioma Worldwide fundamental short-horizon model. Still, Brazil’s one year return (denominated in USD) remained above that of Russia and most other emerging countries.

See graph from the Equity Risk Monitors as of 6 January 2023:

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