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Equity Risk Monitors — July 18, 2023

Equity Risk Monitor Highlights | Week Ended July 14, 2023

  • European stocks rebound as volatility and correlations rise
  • After falling for four straight months, currency risk popped up last week
  • US Asset correlations remain low, but they have risen outside the US

European stocks rebound as volatility and correlations rise

Much has changed from last week to this week in the world of risk and return. In last week’s Weekly Highlights we noted that the STOXX® Europe 600 had its worst return week in months. For the week ended 14 July 2023 the European market largely retraced its steps, gaining almost 3%. However, risk jumped owing to this back-and-forth action, with both volatility and correlation in most European countries climbing, along with short-horizon aggregate risk according to both the fundamental and statistical models. In the hotspots charts below, an upward arrow for volatility indicates that risk for that country’s equity market rose by at least one percentage point. In the correlation charts, an upward arrow shows where correlation has increased by at least 0.02. For managers making country bets the widespread increases in both volatility and correlation may have had a significant impact on active risk.

See graphs from all the Equity Risk Monitors for the week ended 14 July 2023:

See graph from the European Equity Risk Monitor for the week ended 14 July 2023:

After falling for four straight months, currency risk popped up last week

There was another big change from last week’s commentary on currency risk that may also have had an impact on active risk. As of 7 July 2023, most developed market currencies were at the low end of their one-year risk range and the high end of their one-year return range. Just a week later that was no longer the case. While individual currencies have remained at or near their return highs, risk for most is no longer at its low. All currencies’ risk is now higher than the minimum level seen in the last year, with CAD closest to the low and SGD, SEK and CHF all substantially higher (proportionally). SGD remains the lowest risk of the developed-market currencies, but its current risk level as compared with its low is higher than most other currencies. Correspondingly, aggregate currency risk for the STOXX Global 1800 Index has increased after falling steadily since March, as measured by Axioma Worldwide fundamental medium-horizon model. Still, it remains substantially lower than it has been for the past 12 months.

See graph from all the Equity Risk Monitors for the week ended 14 July 2023:

See graph from the STOXX Global 1800 Equity Risk Monitor for the week ended 14 July 2023:

US Asset correlations remain low, but they have risen outside the US

The US market, still dominated by Technology and Technology-related names, continues to look very different from developed markets ex-US. We have written a lot recently about the unusually high positive spread between the forecasts from the statistical and fundamental risk perspectives, suggesting the statistical model may “see” a risk not captured by the fundamental model. We do not see the same gap in Developed Markets ex-US. Another major difference we see is in the path of correlations. The dominance by a few names in the US has resulted in little change in the level of correlation between individual stocks, at both 20-day and 60-day horizons. And although the current level of correlation is similar to what we see outside the US, the path of correlations has been upward in the latter. (We would expect correlations to be higher in the US as stocks are more homogeneous there as compared with the multi-country nature of non-US markets.) Higher stock correlations are driving non-US risk up, while the fundamental view of risk for the US has continued to fall.

See graphs from the STOXX Global 1800 ex-US and STOXX USA 900 Equity Risk Monitors for the week ended 14 July 2023: