Equity Risk Monitors — March 15, 2021

Equity Risk Monitor Highlights | Week Ended March 11, 2021

Despite the recent jump, US Value’s correlations with other style factors remain stable; China among the riskiest regions; China’s style risk surges

Despite the recent jump, US Value’s correlations with other style factors remain stable

The US Value factor’s recent surge—its return in the last month was about 2.5 standard deviations above average—was a sharp reversal from the drubbing it took last year. Yet, despite its newfound popularity, its correlations with other factors have remained remarkably stable. Since the end of 2020, the only factor Value has seen a meaningful change in correlation with, in terms of the medium-horizon model, is Volatility, where the correlation dropped from 0.35 to 0.17. Still, the drop is one of the biggest among all the style factor pairs. Value’s volatility has also come down, so all things being equal, it is unlikely that Value’s recent fortunes have led to higher medium-horizon active risk. In the short-horizon model, a number of factor pairs have seen larger changes in correlations (although still not for Value), so managers may want to look out for upcoming risk impact, as the short horizon model tends to lead the medium.

See graph from the United States Equity Risk Monitor as of 11 March 2021:

China among the riskiest regions

While stocks around the globe rose last week, the Chinese market fell as its risk climbed. Chinese stocks have plunged deeper than those of most other regions in 2021, and the small increase in the market late last week did not do much to make up for those losses. In fact, the STOXX China A 900 weekly return was still negative, with the Chinese index posting a cumulative year-to-date loss of 2% last Thursday. China’s year-to-date return was the only one among major regions that was still in negative territory last week. This is in stark contrast with 2020, when China finished the year as the biggest winner, with an annual return of 23%.

China is now not only the biggest loser, but also the riskiest region, eight months after the country posted the lowest volatility, as predicted by Axioma’s local short-horizon fundamental models. China’s short-horizon risk has risen 750 basis points this year, reaching 24% last week, as measured by Axioma’s China model.

See graph from the China Equity Risk Monitor as of 11 March 2021:

China’s style risk surges

The medium-horizon variant of the China fundamental model did not rise as much as its short-horizon counterpart. However, the style risk component of the medium-horizon model has skyrocketed since mid-February to levels not seen since 2019. Market risk was the main driver for the climb in the STOXX China A 900 index’s total risk since mid-February. Style risk—typically a small component of overall benchmark risk—contributed to the increase. However, after it reached a 2-year peak on Tuesday, style risk receded somewhat. Industry and Specific risk fell over the past month, offsetting some of the rise in market risk. While specific risk is also only a small part of total benchmark risk, as with style risk it is likely to figure far more prominently in actively managed portfolios.

See graph from the China Equity Risk Monitor as of 11 March 2021:

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