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Equity Risk Monitors — October 5, 2020

Equity Risk Monitor Highlights | Week Ended October 1, 2020

US Energy the only loser in Q3; Value continues to underperform; Emerging and Developed Market risk at parity

US Energy the only loser in Q3

Among the 11 US sectors in the STOXX USA 900 index, Energy alone recorded a loss for the third quarter, dropping 17%, while Consumer Discretionary, Information Technology, Industrials and Materials all saw gains of more than 13%. Year-to-date, Consumer Discretionary and Information Technology were the biggest winners, with cumulative returns of about 30%. However, Materials barely made it into the black, while Industrials still posted losses for the year. Energy saw the largest loss so far in 2020, at 50%.

Energy was also the riskiest US sector, as measured by Axioma’s US medium-horizon fundamental model. Energy’s risk of 42% was almost triple that of the least risky sector—Consumer Staples—at the end of September. However, despite its high risk level, Energy’s contribution to STOXX USA 900 risk was the smallest among all US sectors last week, as Energy’s weight in the US index has fallen dramatically since one year ago, with the sector becoming the smallest in the index.

See graph from the US Equity Risk Monitor as of 1 October 2020:

Value continues to underperform

Value has suffered greatly this year, producing negative year-to-date returns in all regions Axioma models track closely, except Asia-Pacific ex-Japan where it was flat. The largest year-to-date loss (of 8%) was recorded in Australia, as measured by Axioma’s Australia medium-horizon fundamental model. This return for Value in Australia was almost four standard deviations below average. Outsized losses for Value were also seen in the US, Europe, Japan, Emerging Markets and Worldwide models.

Value in Australia was also among the riskiest factors in the Australian model, with its volatility exceeded only by that of Size, Market Sensitivity, Volatility and Momentum.

See graph from the Australia Equity Risk Monitor as of 1 October 2020:

Emerging and Developed Market risk at parity

Both emerging and developed markets had a great run in the third quarter, as their risk converged to parity. Risk has been on a downward trajectory in both markets since April, despite a resurgence in coronavirus cases, enhanced geopolitical risks and a sluggish global economy. The short-horizon risk of the STOXX Emerging 1500 even fell below that of STOXX Global 1800, with the ratio of the Emerging and Developed risk remaining below one between April and July, as measured by Axioma’s Emerging and Worldwide short-horizon fundamental models, respectively. Over the past couple of months, however, the risk of the two indices was at about the same level. That is in stark contrast with the beginning of the year when Emerging Markets’ risk was 50% higher than that of Developed Markets.

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