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Equity Risk Monitors — November 22, 2023

Equity Risk Monitor Highlights | Week Ended November 17, 2023

  • Volatilities and correlations climb in Europe
  • US small caps among the big winners of last week
  • UK Earnings Yield style factor takes off

Volatilities and correlations climb in Europe

Volatilities and correlations at individual country levels climbed in Europe, while the European and global equity markets continued to advance, driven by optimism that major Central Banks are done raising rates as inflation cooled. The Global Volatility and Correlation Hotspots charts show that six countries in Europe saw volatility increases of more than one percentage point and most European countries saw correlation increases of more than two percentage points over the past five business days, as measured by Axioma Worldwide fundamental short-horizon risk model.

The rise in stock correlations and volatility pushed the risk of the STOXX® Europe 600 Index slightly higher last week, as measured by Axioma Europe fundamental short-horizon model. Nonetheless, Europe remained among the least risky geographies tracked by Axioma’s Equity Risk Monitors.

See graphs from the Equity Risk Monitors of 17 November 2023:

US small caps among the big winners of last week

US small capitalization stocks were the big winners last week. The STOXX® US Small Cap Index return of nearly 5% over the past five business days was more than double that of its large cap counterpart index. The Small Cap Index’s weekly return was also nearly two standard deviations higher than the expectation at the beginning of the week. Still, US small caps’ year-to-date cumulative return of 5.40% was lagging the US large cap performance by almost 15 percentage points as of last Friday.

The risk of the US small caps rose 200 basis points last week to 20% on Friday—about five percentage points higher than the risk of the STOXX® US Index, as measured by Axioma’s US Small Cap and US All Cap short-horizon fundamental models, respectively. In other words, US small caps are now about 34% riskier than large caps, higher than the 19% relative median riskiness seen over the past six years.

See graph from the STOXX US Small Cap Equity Risk Monitors of 17 November 2023:

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

UK Earnings Yield style factor takes off

The UK Earnings Yield has been trending sharply upward since September, with its three-month return of 6% being more than four standard deviations higher than the expectations at the beginning of the period. After shaving losses from earlier in the year, Earnings Yield is now the best performer among all style factors in Axioma’s UK Fundamental Medium-Horizon Model over the past twelve months.

Earnings Yield’s three-month return was positive in all other regions covered by the Equity Risk Monitors, except in the US. Still, US saw the second-largest positive return for the factor (of 5.11%), after Japan (5.29%), for the one-year period.

In contrast, UK Growth continued to fall, its 12-month return dipping below -4%. Growth saw negative one-year returns in all Axioma risk models, except in the US Small Cap, Asia Pacific ex-Japan, and Emerging Markets models.

See graph from the STOXX UK Equity Risk Monitor of 17 November 2023: