Global ex-US markets reach new YTD highs on vaccine news and start of Biden transition; Japan reaches 30-year high on vaccine news and Size factor returns shoot up; European investors react positively to vaccine news and start their rotation trade
Global ex-US markets reach new YTD highs on vaccine news and start of Biden transition
Global ex-US markets continued to react positively this week to reports that several vaccines could become available soon, reducing fears of further lockdowns in 2021. The news flipped the downtrend that started in October on rising new infections across major markets with winter still to come, putting markets back on their previous COVID-rebound trajectory.
Volatility, which had been on the rise since late October, also reversed course on the news, but remains elevated, even when compared with recent lows. Pairwise stock correlations rose slightly this week as the same pandemic-profiteering stocks are still expected to outperform in the short term, especially with the holiday shopping season still to start.
See graph from the Developed Markets Ex-US Risk Monitor as of 26 November 2020:
Japan reaches 30-year high on vaccine news and Size factor returns shoot up
The Japanese market is having its best month in a very long time on the back of positive vaccine news, this despite rising new infections at home, a strengthening JPY, and lingering questions about the 2021 Tokyo Olympics. Unlike global markets where vaccine news led to lower volatility levels, the predicted risk of the STOXX Japan 600 index has been on an upward trend since the end of October, according to both variants of the short-horizon Japan risk model (fundamental and statistical).
Higher volatility has pushed investors to the safety of large caps, with the Size factor return shooting up to a 12-month high and making it the most volatile style factor in our models by far. Portfolios with a Size tilt have experienced increased levels of active risk, especially given the factor’s increasingly positive correlation with Market Sensitivity. For those managers, the last remaining two negative correlations for the Size factor are with Growth (-0.36) and Medium-Term Momentum (-0.33).
See graph from the Japan Equity Risk Monitor as of 26 November 2020:
European investors react positively to vaccine news and start their rotation trade
European markets also reacted positively to the vaccine news, but also saw higher levels of volatility on the back of rising new infections and stricter safe distancing measures in key cities. The fundamental style factors point to the onset of a rotational trade since the announcements. Growth and Profitability factors fell, while Value and Dividend Yield rose. Earnings Yield also rose briefly, as investors rotated out of high PER stocks into low PER ones, signaling bargain hunting among previously out-of-favor stocks. This rotation also pushed down the Medium-Term Momentum factor, which is having its worst month this year and has now overtaken Market Sensitivity and Size as the riskiest style factor in our model. Sharply higher factor volatility for the month has also driven market volatility higher, and investors with strong style factor tilts in their portfolios have experienced rising levels of active risk as a result of lower diversification.
See graph from the Europe Equity Risk Monitor as of 26 November 2020: