Equity Risk Monitors — March 18, 2022

Equity Risk Monitor Highlights | Week Ended March 17, 2022

  • Europe leads last week’s equity rebound
  • Sanctions on Russia hit Emerging Markets Energy sector
  • Asset diversification tanks globally

Europe leads last week’s equity rebound

Most major indices rebounded last week, with the STOXX® Europe 600 Index posting the largest gain at nearly 6%. All European sectors were up, with the rise in Financial, Industrial and Health Care stocks contributing more than half of the European index’s weekly positive return. The countries with the largest representation in the index—France, Germany, the UK and Switzerland—were responsible for more than 60% of the index’s weekly gain.

Although still down 7% year-to-date, the STOXX® Europe 600 Index has outperformed the STOXX® USA 900 and STOXX® Global 1800 indices, which both posted 8% year-to-date losses. At the same time, the European index saw the largest jump in risk in March, from 15% at the end of February to 21% last week, as measured by the Axioma Europe fundamental short-horizon model. Developed Europe became the third riskiest region after the US and Japan.

See graph from the Europe Equity Risk Monitor as of 17 March 2022:

Sanctions on Russia hit Emerging Markets Energy sector

With a year-to-date return of -15%, Energy has been the worst performer among all sectors in the STOXX® Emerging Markets 1500 Index so far in 2022. This is in stark contrast to the Energy sector in the STOXX Global 1800 Index, which was the only global sector to see gains this year, posting a year-to-date return of 25% as of last Thursday. Energy has a small weight in both indices (below 7%), but had a substantial impact on the returns of each index (although in opposite directions).

Energy was responsible for a fifth of the year-to-date loss of 5% recorded by the STOXX® Emerging Markets 1500 Index. The drop in Russian energy stocks was responsible for the overall negative contribution of the Energy sector to the Emerging index’s year-to-date return. The loss recorded by Russian energy stocks offset positive contributions from Brazilian, Thai and Indonesian Energy stocks.Energy’s weight in the STOXX® Emerging Markets 1500 is now lower than it was one year ago and so is the sector’s contribution to benchmark risk.

See graph from the Emerging Markets Equity Risk Monitors as of 17 March 2022:

Asset diversification tanks globally

Asset diversification tanked globally and particularly in the US, Europe and Japan where it reached a 12-month low last week. That is, managers of equity portfolios were in the worst position to diversify their portfolios in at least a year in these regions. After reaching a near-term high in November of 2021 when it exceeded 5.0, the asset diversification ratio in the STOXX® Global 1800 plummeted to almost 3.0 last week, as measured by Axioma’s Worldwide median-horizon fundamental model. In the US, Europe and Japan, the ratio dipped below 3.0. The asset-diversification ratio is calculated as the weighted average asset variance for each stock in the index, divided by the total forecasted index variance, and measures the impact of correlations on total risk.

See graph from the Global Developed Markets Equity Risk Monitor as of 17 March 2022:

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