Equity Risk Monitors — March 7, 2022

Equity Risk Monitor Highlights | Week Ended March 3, 2022

  • Developed Europe’s country risk at an eight-year high
  • Energy stocks soar, lifting the US market
  • Ruble’s volatility climbs but still lags Turkish lira

Developed Europe’s country risk at an eight-year high

While both the total risk and country risk of the STOXX® Europe 600 Index were slightly down last week, country risk remained at levels not seen since the Russian Financial Crisis (2014-2016). Developed Europe stocks dropped last week, bucking the trend of major equity markets—which eked out small gains. Germany and France—together making up about a third of the STOXX® Europe 600 Index—drove down the European market. In contrast, the UK (with an index weight of 23%) offset some of the losses.

A look at the major components of risk showed that country risk soared to an eight-year high by February 24, immediately after Russia invaded Ukraine. Although Russia is not part of the European index, its connections with western European countries are reflected in the jump in country risk. While both Market and Country risk fell a bit, Style, Industry, Specific and Currency risk were all up last week, as measured by Axioma’s Europe fundamental medium-horizon model.

See graph from the Europe Equity Risk Monitor as of 3 March 2022:

Energy stocks soar, lifting the US market

Energy stocks soared 9% last week, fueled by the rise in oil prices as the Russia-Ukraine conflict intensified. Although representing less than 4% of the US market, Energy contributed nearly a fifth of the STOXX® USA 900 Index’s weekly gain of 2%. All US sectors were up last week, except for Information Technology and Communication Services, the third-biggest and biggest losers, respectively, in 2022, with losses of over 13%.

Energy’s gain of over 30% so far this year stood in stark contrast to all other sectors in the US index, which reported year-to-date losses. Energy’s weight in the index is now higher than it was 12 months ago, but its contribution to index risk is less than one year ago and less than its weight would otherwise indicate, which is unusual. Bear in mind, however, that Energy’s stand-alone risk is the highest among the 11 US sectors.

See graph from the United States Equity Risk Monitor as of 3 March 2022:

Ruble’s volatility climbs but still lags Turkish lira

The risk of the ruble climbed as the Russian currency hit a record low against the US dollar last week. The ruble’s risk has jumped 13 percentage points in 2022 to 23% last week, pushing the Russian currency to the high-end of its one-year volatility range. The ruble’s risk is now above the levels seen at the height of the COVID crisis in 2020, but lower than levels recorded during the Global Financial Crisis in 2008. In addition, the ruble’s risk last week was about half the record-high levels of the Ruble Crisis in 1998, as measured by Axioma Worldwide short-horizon fundamental model. Given that Russia invaded Ukraine less than two weeks ago, further increases in the ruble’s risk are likely.

The ruble recorded a one-year loss of over 20% as of last Thursday, falling to the low-end of its one-year return range against the US dollar. Still, it did not exceed the Turkish lira’s year-to-date loss of nearly 40%. The Turkish currency remained the riskiest among major emerging currencies, at 35% volatility. In contrast, most other emerging currencies’ risk remained below 10%.

See graph from the Emerging Markets Equity Risk Monitors as of 3 March 2022:

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