Equity Risk Monitors — November 22, 2021

Equity Risk Monitor Highlights | Week Ended November 18, 2021

  • Investors shunning dividend yield
  • European trading declines amid new COVID restrictions
  • US dollar strengthens

Investors shunning dividend yield

Investors seem to be turning away from seeking higher dividend yields, as higher bond yields may become a more profitable alternative, given the high probability of inflation-driven rate hikes. The plunge in the return of the Dividend Yield style factor may indicate not only investors’ shift to bond yields, but also a concern that companies may no longer be able to pay dividends due to losses or bankruptcy risk.

The Dividend Yield style factor saw a strong reversal in May and its returns have been trending downwards ever since in most of Axioma’s medium-horizon fundamental models. The Dividend Yield factor recorded negative six-month returns in all models, posting outsized cumulative six-month returns—i.e., more than two standard deviations below the expectations at the beginning of the period in each model—in Europe, Asia Pacific ex-Japan, Australia, Developed Markets ex-US, Worldwide and Emerging Markets models. Moreover, the style factor recorded the most negative one-year return among fundamental style factors in most models.

See graph from the United States Equity Risk Monitor as of 18 November 2021:

European trading declines amid new COVID restrictions

European trading activity has been declining since October, as COVID cases surged, and new lockdowns and restrictions were implemented in Europe. After the average daily trading volume (ADV) for stocks in the STOXX Europe 600 index hit a near-term high of about $32 billion in early October, trading activity slid below $28 billion last week.

This is in stark contrast with the rest of the developed world, where trading activity has been climbing over the same period. Although Europe is once again the epicenter of the COVID pandemic, the STOXX Europe 600 index still managed a modest weekly gain (of 0.5%). Trading volumes for all sectors in the STOXX Europe 600 index were either near or below their 12-month averages, except that of Information Technology, which was slightly higher than the average.

See graph from the Europe Equity Risk Monitor as of 18 November 2021:

US dollar strengthens

The US dollar gained ground against major developed currencies, pushing them toward the low-ends of their one-year return ranges. The biggest losers were the Japanese yen and the euro, whose one-year returns dipped below -5% and -9%, respectively, as the European and Japanese central banks held their monetary policies steady, signaling no intention of increasing rates or stimulus withdrawal.

Although down from their peaks, the Norwegian krone and Canadian dollar still posted the highest positive one-year gains among developed-market currencies. The two oil-sensitive currencies were bolstered by their respective central banks. The Norwegian central bank raised interest rates for the first time in two years in September, and the Canadian central bank signaled a rate hike as soon as April 2022. The Norwegian currency remained the most volatile and the Singapore dollar the least volatile among major developed currencies.

See graph from the Equity Risk Monitors as of 18 November 2021:

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