Equity Risk Monitors — May 24, 2021

Equity Risk Monitor Highlights | Week Ended May 20, 2021

  • US and Japan now the second- and third-riskiest countries after China
  • Plunging factor volatility drives decline in China’s risk
  • Small-cap shares outperform worldwide

US and Japan now the second- and third-riskiest countries after China

While risk retreated around the globe, the US and Japan were the only two regions to see sharp increases in volatility in May, as measured by Axioma’s short-horizon fundamental local models. Risk increased 8% in Japan and 13% in the US since the end of April, making them second and third riskiest, respectively, after China, among all regions Axioma models track closely.

In contrast, China’s volatility tanked this month. China’s short-horizon risk forecast dropped 13% from the end of April, for a total decrease of 24% since its year-to-date peak at the beginning of March, as measured by Axioma’s China short-horizon fundamental model. Despite the decline, China’s risk of 19% was 100 basis points higher than that of Japan and 200 basis points higher than that of the US, as of last Thursday.

See graph from the US Equity Risk Monitor as of 20 May 2021:

See graph from the China Equity Risk Monitor as of 20 May 2021:

Plunging factor volatility drives decline in China’s risk

China’s factor volatility plummeted over the past four weeks, driving down the risk of the STOXX China A 900 index, as noted above. The decline in factor correlations and changes in stock exposures pulled the decline in index risk further down, while the change in index composition offset some of it, as revealed by the decomposition of the change in risk from the perspective of Axioma’s China short-horizon fundamental model.

Lower factor volatility led the decline in risk in most regions, with the biggest impact in China over the past month among all Axioma short-horizon fundamental models. Lower factor volatility in China was also the main driver of the fall in STOXX China A 900 index risk over the past three, six and 12 months. However, China’s factor volatility was up slightly last week.

See graph from the China Equity Risk Monitor as of 20 May 2021:

Small-cap shares outperform worldwide

Over the past three months, the Size factor in all Axioma’s medium-horizon models recorded negative returns, indicating that during this period small capitalization stocks outperformed large capitalization stocks. However, all three-month returns remained within one standard deviation of the expectation at the beginning of the period, as measured by Axioma’s local models.

Size posted the most negative 12-month return among all style factors in most of Axioma’s medium-horizon fundamental models. Canada and the UK stood out with 12-month returns to Size of -20% and -22%, respectively. In contrast, China and Japan were the only regions to see positive 12-month returns to Size, and the returns were remarkably positive at 16% and 11%, respectively, despite the drop over the past three months. That is, large capitalization stocks outperformed in those markets over the past year.

See graph from the Global Developed Markets Equity Risk Monitor as of 20 May 2021:

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