Equity Risk Monitors — March 29, 2021

Equity Risk Monitor Highlights | Week Ended March 25, 2021

  • Most equity markets have soared since the 2020 downturn
  • Equity risk still above pre-pandemic levels
  • Post-vaccine rotation reflected in both sector and style performance

Most equity markets have soared since the 2020 downturn

One year after the March 2020 equity selloff, most markets around the globe have rebounded strongly. The Global Market Returns map below shows that most countries around the globe posted one-year returns (denominated in US dollars) of more than 40%, with some countries, including Norway, Sweden, South Korea and Taiwan, seeing 12-month returns of around 100%. The few countries reporting losses for this period are relatively small and categorized as “frontier” (i.e., not making it into the emerging markets category).

In aggregate, both the STOXX Global 1800 and the STOXX Emerging Markets 1500 indices posted 12-month gains above 40%. In each case, the 12-month return was even higher than the elevated risk a year ago would have forecast—exceeding one standard deviation of the expectations at the beginning of the period, as forecasted by Axioma’s Worldwide and Emerging Market fundamental short-horizon models, respectively.

See graphs from the Global Developed Markets Equity Risk Monitor as of 25 March 2021:

Equity risk remains above pre-pandemic levels

While equity risk has fallen substantially since last year’s peaks, it remains above pre-pandemic levels in all regions Axioma models track closely. The total risk of the STOXX Global 1800 and STOXX Emerging Market 1500 as of last Thursday was half of the 40% highs seen in late-March—early-April of last year, as measured by Axioma’s Worldwide and Emerging Market fundamental short-horizon models, respectively. Still, current levels are nearly double those at the end of 2019 for these two indices. (For longer-term charts, please contact your Qontigo representative.)

The decomposition of the change in risk from the point of view of the factor model shows that the decline in factor volatility was the driver of the drop in total risk, while the change in index composition offset a small part of the decrease over the past year. We observed this pattern in all regions covered by Axioma models. When analyzing the decomposition of risk from the stock-level vantage point, lower stock volatility and lower stock correlations had a roughly equal impact on the decline in benchmark risk in most regions Axioma models cover closely. In contrast, China saw a different pattern, with the increase in stock volatility offsetting part of the decline in stock correlations in the STOXX China A 900 index.

See graphs from the Global Developed Markets Equity Risk Monitor as of 25 March 2021:

Post-vaccine rotation reflected in both sector and style performance

As the pandemic impacted the lives of people around the world, Info Tech, Consumer Discretionary and Health Care stocks steadily and significantly outperformed other sectors. This was reflected in Momentum’s large gains for most of last year, until vaccine news in November changed the market paradigm and we entered into a sector rotation. Energy, Financials and Real Estate became the new winners in 2021. Value’s fortunes also changed, showing gains after more than a decade of dismal performance. Despite a small dip in March, Market Sensitivity and Volatility saw the largest 12-month gains among all style factors in Axioma’s Worldwide medium-horizon fundamental model, indicating that high-beta and high-volatility stocks strongly outperformed their low-beta and low-volatility counterparts over this period.

See graphs from the Global Developed Markets Equity Risk Monitor as of 25 March 2021:

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