Equity Risk Monitors — November 15, 2021

Equity Risk Monitor Highlights | Week Ended November 11, 2021

  • Inflation worries flip US style factors
  • Statistical risk forecasts sound an alarm in China
  • Brazil turns riskiest emerging market

Inflation worries flip US style factors

As inflation concerns intensified last week, we observed several performance reversals of style factors in Axioma’s US fundamental medium-horizon model. Returns for Dividend Yield, Earnings Yield, and Value all rose last week, after falling in previous weeks. In contrast, Market Sensitivity did just the opposite, dropping last week (meaning lower beta stocks had higher returns), after producing strongly positive performance earlier in the year. That said, the reversals were not dramatic, with all weekly returns remaining within one standard deviation of the expectations at the beginning of the week.

See graph from the United States Equity Risk Monitor as of 11 November 2021:

Statistical risk forecasts sound an alarm in China

As fundamental risk has continued to drop in China, statistical-fundamental risk spreads have widened, suggesting that extra risk is being picked up by the statistical models. This may point to potential changes in the risk regime and/or the emergence of non-traditional factor risk sources in the Chinese stock market. The medium-horizon statistical variant for the China A 900 Index has been on an upward trajectory since August, while the short-horizon statistical variant declined over the same period, as measured by Axioma’s China model.

However, the risk spreads between statistical and fundamental forecasts climbed over the past couple of months at both horizons. The medium-term statistical and fundamental forecasts agreed in early October but the spread has widened significantly since then, reaching 2% last week, as the fundamental forecast fell and the statistical forecast rose. The spread is now at a level not seen since 2018. Similarly, the spread between statistical and fundamental forecasts at the short horizon also widened but only by about 1%, as both fell.

See graph from the China Equity Risk Monitor as of 11 November 2021:

Brazil turns riskiest emerging market

Brazil became the riskiest emerging market, as investors fretted over its fiscal policy, growth outlook and political turmoil. Brazilian stocks have fallen nearly 18% over the past three months, erasing gains from earlier in the year and resulting in a 12-month return slightly above zero. Brazil is now one of the worst performers over the one-year period, when looking at country returns denominated in US dollars.

After dipping to a year-to-date low of 25% in July, Brazil’s risk rose to 30% last week, as measured by Axioma’s short-horizon Worldwide fundamental model. At the same time, the gap between Brazil’s volatility and that of other emerging markets widened. Brazil’s risk is now about 10 percentage points higher than the average risk across major emerging markets.

See graph from the Equity Risk Monitors as of 11 November 2021:

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