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Equity Risk Monitors — June 28, 2021

Equity Risk Monitor Highlights | Week Ended June 24, 2021

  • Volatility continues to drop
  • Growth stocks thrive in China
  • Correlations spike in Japan

Volatility continues to drop

Risk remained low as most equity markets around the globe gained ground last week. All geographies Axioma models track closely continued to have a negative risk spread between their short-horizon (lower) and medium-horizon (higher) model variants, signaling that—at least in the near-term—volatility will continue to drop around the globe.

At the height of the Covid pandemic in March 2020, the short-medium horizon spread reached a positive record of nine percentage points—the highest in at least a decade for the STOXX Global 1800 index, as measured by Axioma’s Worldwide fundamental model. Five months later, the spread flipped to a record of negative five percentage points. While the spread briefly entered positive territory in November 2020—it has since been on a declining trend (i.e., it became more negative), falling to negative three percentage points last week.

See graphs from the Global Developed Equity Risk Monitor as of 24 June 2021:

Growth stocks thrive in China

The Growth style factor in Axioma’s China medium-horizon fundamental model produced the highest cumulative one-year return among all other fundamental style factors in the model. The return of 5% was more than two standard deviations above the expectation one year ago, as measured by the China model. Growth recorded positive 12-month returns in all geographies Axioma models track closely, but only China recorded an outsized return (above/below two standard deviations).

Growth in China was positioned at the high end of its one-year volatility range as of last week. However, Growth’s volatility level was somewhere in the middle of the pack, compared with other style factors in the China model.

See graph from the China Equity Risk Monitor as of 24 June 2021:

Correlations spike in Japan

After dipping to almost a 12-month low two weeks ago, asset correlations in Japan shot up last week. While Japan’s equity market remained flat, the median pairwise realized 20-day correlation in the STOXX Japan 600 index more than doubled in seven business days, nearing 0.40 on Thursday. While the 60-day median pairwise asset correlation also jumped last week, it may continue to follow in the footsteps of its shorter-term counterpart in the next few weeks. Higher asset correlations reflect concerns that economic and market events may drive stock prices in Japan, rather than companies’ individual characteristics.

See graph from the Japan Equity Risk Monitor as of 24 June 2021:

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