Equity Risk Monitors — November 29, 2021

Equity Risk Monitor Highlights | Week Ended November 25, 2021

  • US investors play defense ahead of the holidays
  • Emerging market investors not compensated for higher risk
  • Turkish lira plunges on rising regulatory risk

US investors play defense ahead of the holidays

Investors in the US turned defensive once again last week ahead of the holiday season. Market Sensitivity (beta) and Volatility factors both saw strong negative returns, as investors dumped high beta, volatile stocks, while seeking the safety of large caps (the Size factor also rose strongly last week).

On the fundamental side, Value, Profitability, and Earnings Yield rose sharply, while Growth and Leverage declined. Together with the moves among the technical factors noted above, the shift confirmed the implementation of more defensive strategies by US investors, as they embraced the safety of quality stocks to protect their downside risk ahead of year-end performance reviews.

See graph from the United States Equity Risk Monitor as of 25 November 2021:

Emerging market investors not compensated for higher risk

Investors in emerging markets have yet to be compensated for the additional risk they took on, compared with their developed market peers, in 2021. Last week ended with few differences in the one-year returns between the two economic regions, after excluding the handful of hotspots (Turkey, Brazil, Columbia, and Peru). The average volatility for emerging markets stands at 19% versus 16.4% for developed, but the return for developed markets is some two percentage points higher in the last 12 months (20% vs 18% for emerging markets).

This contrasts sharply with the year following the global financial crisis, when emerging economies were the driver of the global economic recovery and fund flows flooded into emerging markets, driving high returns for investors. This year, global investors have preferred developed markets and the safety of government spending and stimulus programs.

See graph from the Equity Risk Monitors as of 25 November 2021:

Turkish lira plunges on rising regulatory risk

Currency traders once again reacted to the political interference in Turkey’s central bank monetary decisions to cut interest rates. The lira ended last week alone among emerging market currencies, as it declined sharply against the US dollar and saw its volatility almost double.

On the positive side, it appears that the lira’s troubles have not increased systemic risk among other emerging market currencies and traders seem to believe this is a purely domestic issue. Of course, we have been here before with the lira, so investors have a playbook from 2018 to which they can turn for guidance as to how bad things could potentially get for the currency in the short-term.

See graph from the Equity Risk Monitors as of 25 November 2021:

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