Equity Risk Monitors — July 6, 2021

Equity Risk Monitor Highlights | Week Ended July 1, 2021

  • Small Caps big winners in first-half 2021
  • Russell 2000’s industry risk spikes after rebalancing
  • Risk spreads widen in Asia Pacific ex-Japan

Small Caps big winners in first-half 2021

Small Caps were among the big winners in the first half of 2021, with the Size factor recording the highest or second-highest cumulative absolute year-to-date return among all other style factors in most Axioma models. Emerging Markets saw the biggest negative six-month return across all regions (nearly -12%), which was more than two standard deviations above the expectations six months ago, as measured by the Axioma Emerging Markets medium-horizon fundamental model. The magnitude of the year-to-date Size factor return in the Worldwide model was about half the return of the Emerging Markets model as of last week.

In contrast, Japan was the only region where the six-month return to Size was positive, reflecting the fact that larger caps fared better there. For additional information on style factor performance year-to-date and more details on the current risk environment, please join us for our Qontigo Insight Quarterly Risk Review webinar on July 13, 2021.

See graph from the Emerging Markets Equity Risk Monitor as of 1 July 2021:

Russell 2000’s industry risk spikes after rebalancing

While market risk continued to drive the steady decline in the Russell 2000’s total risk, other components of risk shifted following the rebalancing of the index on June 25. Industry risk jumped about 16%, as measured by the Axioma US Small Cap medium-horizon fundamental model. Style risk and stock-specific risk, which represent only a small part of the total benchmark risk, went in opposite directions immediately following the reconstitution of the Russell 2000: style risk spiked as stock-specific risk fell by about the same magnitude.

See graph from the US Small Cap Equity Risk Monitor as of 1 July 2021:

Risk spreads widen in Asia Pacific ex-Japan

Risk spreads widened significantly in Asia Pacific ex-Japan, with the extra risk picked up by the short-horizon statistical model potentially reflecting changes in the risk regime and/or the emergence of non-traditional factor risk sources. Asia Pacific ex-Japan’s risk did not stand out, as its short-horizon forecasted volatility of 12% positioned the region somewhere in the middle of the pack among the geographies Axioma models track closely. However, the risk spread between the statistical and fundamental forecasts for the STOXX Asia-Pacific 600 ex-Japan became positive in May 2020 and neared 4% last week, as measured by the Axioma Asia-Pacific ex-Japan short-horizon fundamental model. Statistical-fundamental spreads also rose in Emerging Markets and the United States, but remained below 2%.

See graph from the Asia Pacific ex-Japan Equity Risk Monitor as of 1 July 2021:

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