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Equity Risk Monitors — August 1, 2023

Equity Risk Monitor Highlights | Week Ended July 28, 2023

  • US tech sector in the lead again
  • Value continues to outperform worldwide
  • UK risk jumps in July

US tech sector in the lead again

After a terrible 2022 when the sector dropped more than 30%, US Information Technology has become the biggest winner so far in 2023, lifted by AI-related technologies. Info Tech has gained 46% in the first seven months of this year, with Apple, Nvidia and Microsoft being responsible for 65% of the sector year-to-date gain. The tech sector also had the best performance among the 11 sectors in the STOXX USA 900 index over the past three, six and 12 months. The dominance of Info Tech in the US market and the sector’s continued success, resulted in Info Tech having the largest contribution to the US index’s gains over these three horizons.

Whereas Info Tech started the year as the riskiest sector, its volatility has fallen along with that of the rest of the US sectors, and it is now the third riskiest after Energy and Communication Services. As a result of its high weight, Info Tech has remained the largest contributor to the US benchmark risk, its contribution greatly surpassing its weight in the index. Bets on the sector may therefore be even riskier than expected.

See graphs from the United States Equity Risk Monitor of 28 July 2023:

Value continues to outperform worldwide

The resurgence of cyclical and growth sectors—such as Information Technology, Consumer Discretionary and Industrials—did not seem to have hurt the Value factor. The style factor has seen positive returns over the past week, month, and three, six, and twelve months in Axioma’s Worldwide fundamental medium-horizon model. With a 12-month return of nearly 5%, Value is now the best performing fundamental style factor in the Worldwide model.

Value’s one-year return was positive in all regions tracked by the Equity Risk Monitors, with the largest return of 6% recorded in the UK. In addition, UK, Japan, Asia Pacific ex-Japan, Emerging Markets and Developed Markets all saw one-year outsized returns; that is, more than two standard deviations above the predicted volatility at the beginning of the period, as forecasted by each regional model, respectively.

See graph from the Global Developed Markets Equity Risk Monitor as of 28 July 2023:

UK risk jumps in July

With an increase of nearly 30%, the UK market (as measured by the STOXX UK 180) saw the largest jump in short-horizon risk in July among all regions covered by the Equity Risk Monitors, as the country is facing challenging economic conditions, with a tight labor market, unruly inflation and weak growth. At the same time, China, Canada and the US continued to see risk decline. At the end of 2022, the UK was the least risky region and remained among the least volatile geographies throughout the first half of 2023. The recent climb, however, catapulted UK’s risk somewhere in the middle of the pack.

Led by the rise in market risk, the total short-horizon risk of the STOXX UK 180 index rose to its highest level (of 13.5%) this year on Monday. In terms of the other major components of risk, increases in both style and specific risks contributed to the ascent in total risk over the past month, as measured by Axioma UK4 fundamental short-horizon model. In contrast, UK short-horizon industry risk fell in July.

See graph from the United Kingdom Equity Risk Monitor of 28 July 2023: