Equity Risk Monitors — March 15, 2022

Equity Risk Monitor Highlights | Week Ended March 11, 2022

  • Stock volatilities and correlations continue to drive up global risk
  • In China, risk spikes as a new coronavirus wave hits
  • US risk appetites plunge

Stock volatilities and correlations continue to drive up global risk

Rising stock volatilities and correlations continued to drive up global risk, as investors struggled to parse news on inflation, oil prices and the Russia-Ukraine conflict. The decomposition of the change in risk from a dense matrix perspective revealed that higher stock volatilities had a slightly higher impact on the increase in the STOXX® Global 1800 Index’s risk than higher correlations did last week. When analyzing the decomposition of risk from a factor model standpoint, the rise in factor volatility was solely responsible for the increase in the risk of the global index, as measured by Axioma’s Worldwide fundamental short-horizon model.

The STOXX® Global 1800 Index’s risk rose from 17% to 18% last week, but the largest weekly increases were seen by the STOXX® Japan 600 and the STOXX® China A 900, of 13% and 28%, respectively, as measured by Axioma’s Japan and China short-horizon fundamental models, respectively. In contrast, Canada was the only region to see a small decline in risk. Canada is now the least risky, while the US and Japan became the riskiest among the regions we track closely.

See graphs from the Global Developed Markets Equity Risk Monitor as of 11 March 2022:

In China, risk spikes as a new coronavirus wave hits

The risk of the Chinese market spiked, with Chinese stocks suffering one of their largest declines last week. Investors were rattled by a new wave of lockdowns after a surge in coronavirus cases in China, in addition to local regulatory pressure, a potential US delisting, and the dire economic consequences of the war in Ukraine. The medium-horizon risk of the STOXX® China A 900 Index rose from 13% to 15% over the past five business days.

A look at the major components of risk shows that market risk was the main driver of the overall increase in risk last week, while stock-specific risks (which represent a smaller part of total benchmark risk) also rose, but only slightly. In contrast, style and industry risk declined, dipping below their levels at the beginning of the year.

See graph from the China Equity Risk Monitor as of 11 March 2022:

US risk appetites plunge

Despite being slightly up last week, returns to the Market Sensitivity and Volatility style factors have plunged over the past four months in the US, indicating a steep decline in risk appetites. Investors turned to low-beta and low-volatility stocks, shunning high-beta and high-volatility alternatives. The two US style factors recorded among the largest negative three-, six- and 12-month returns, compared with other geographies Axioma models follow closely.

US Market Sensitivity’s three- and six-month returns were below two standard deviations of the expectations at the beginning of each period, while US Volatility’s 12-month return also breached two standard deviations. The 12-month returns to Volatility (-22%) and Market Sensitivity (-15%) were the most negative among all factors in Axioma’s US4 medium-horizon fundamental model.

See graph from the United States Equity Risk Monitor as of 11 March 2022:

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