Equity Risk Monitors — March 22, 2021

Equity Risk Monitor Highlights | Week Ended March 18, 2021

Emerging Markets outperform Developed but remain riskier; US Energy shares take a beating; Developed currencies keep calm vs. the greenback

Emerging Markets outperform Developed but remain riskier

Emerging Markets have marginally outperformed their developed counterparts so far this year, with the STOXX Emerging Markets 1500 up 6% and the STOXX Global 1800 up 4% year to date, as of last Thursday. While returns are similar, Emerging Markets’ path to success has been more volatile. The ratio between the risk of STOXX Emerging Markets 1500 and STOXX Global 1800 reached a peak of 1.29 at the end of February, but has retreated somewhat since.

As of last week, Emerging Markets were 21% riskier than Developed Markets, as measured by the Emerging Market and Worldwide short-horizon fundamental models, respectively. This contrasts with the beginning of the year, when the two risk forecasts were—unusually—at parity.

The chart below does not appear in our Equity Risk Monitors, but can be provided upon request:

US Energy shares take a beating

The US energy sector tumbled last week after a drop in crude oil prices, and remains the riskiest among the 11 sectors in the STOXX USA 900 index. Energy shares fell more than 7% over the span of five business days. Despite last week’s drop, Energy was still the best performing sector in 2021, posting a year-to-date return of 31%. Energy added to the overall decline of the US market last week, which was led by the drop in the largest US sectors: Info Tech, Consumer Discretionary and Health Care, which combined represent more than half of the US market. None of these three sectors fell as much as Energy, though, with their weekly loss remaining below 3%. In contrast, other sectors such as Financials, Industrials and Real Estate were up last week. The overall US market in aggregate saw a weekly loss close to 1%, well within one standard deviation of the expectation at the beginning of the week.

The risk for the STOXX USA 900 index fell slightly last week, as did that of all 11 US sectors, based on the US short-horizon fundamental model forecasts. Energy risk fell in the first part of the week and rose in the second part, for a total weekly decline of 0.25 percentage points. Energy still posted the highest sector volatility at 38%—13 percentage points higher than that of Info Tech, the second riskiest sector in the US.

See graphs from the United States Equity Risk Monitor as of 18 March 2021:

Developed currencies keep calm vs. the greenback

The aggregate currency risk for Developed Markets has changed little in 2021. Major developed market currencies remain at or near the low ends of their one-year volatility ranges against the US dollar. The Norwegian krone emerged as the best performing currency against the greenback over the past 12 months, with a one-year return exceeding 30%, after being one the heaviest hit currencies at the time of the market downturn last year. The krone was also the riskiest currency, with volatility of close to 15%. The Japanese yen was the only major developed currency with a negative one-year return against the greenback. Still, the yen was the second least volatile after the Singapore dollar as of last Thursday.

See graphs from the Global Developed Markets Equity Risk Monitor as of 18 March 2021:

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