- Where are all the traders?
- And speaking of Energy stocks…
- Lower leverage finally pays off
Where are all the traders?
Trading volume for the STOXX® Developed World index (measured in US dollars) continues to be subdued. In fact, it declined last week, ending the week at roughly the same level it was a year ago, despite an increase in equity values of more than 20% over the year. We always expect a decline in volume over the summer, but the current level is even lower than we saw most of the past summer.
Over the past year the US accounted for about 83% of total developed markets trading volume on average (as measured by STOXX® US and STOXX Developed World Index), and it is the US where volume has been the most subdued. Volume for Developed Markets ex-US, while still below peaks in March and June, picked up in September, although volume here also dropped over the last week.
One might expect that what is happening in the Middle East will have a global impact, and other asset classes such as Oil and especially Gold have seen prices rise, so it is a bit curious we haven’t seen higher volume in equities. (Or even higher volume in Energy stocks). We believe one reason for this may be that investors do not know what to do, so they are sitting on the sidelines (more or less) until they see more clarity.
And speaking of Energy stocks…
Reacting to continuing conflict in the Middle East, Energy stocks in the STOXX Developed World index were up almost 5% in the last week, far more than most other sectors (Utilities came in second with a 3.2% gain). Despite Energy’s relatively low weight in the global index (under 5%), it accounted for more than a third of the return for the week.
At the same time, the risk forecast for Energy from Axioma’s Worldwide short-horizon fundamental model’s perspective shot up 9%, from 16.8% to 18.3%, over the week. While the comparable risk forecast rose for every sector (and the overall market), no other sector experienced as large an increase. A month ago, Energy’s risk fell in the middle of the sector pack, lower than that of Communications Services, Consumer Discretionary, Information Technology and Materials. As of Friday, Energy regained its position as the most volatile sector. Still, the risk contribution of the Energy sector remains slightly below what would be expected given its weight (likely because it is less correlated with other sectors than they are with each other), and therefore a diversified portfolio’s bet on Energy may not be quite as risky as one might expect.
The following chart is derived from the STOXX Developed World – Sector Return Contribution chart in the Developed World Equity Risk Monitor of 13 October 2023:
See graphs from the STOXX Developed World Equity Risk Monitor of 13 October 2023:
Lower leverage finally pays off
Although the 10-year bond yield has dipped recently it remains substantially higher than it has been all year. Yet investors did not seem to fear the impact of higher interest rates on companies with more leverage. In the third quarter, the return to the Leverage factor was positive in Axioma’s Worldwide, Developed ex-US, Japan, Europe and Emerging Markets models, meaning that more highly levered stocks outpaced their low- or no-leverage counterparts. The return was negative in the US and UK, perhaps because 10-year rates in those countries have been higher than in a number of other countries/regions. It is a little puzzling that investors were so optimistic – for example, the third quarter factor return in Developed Markets ex-US fell into the 84th percentile relative to history, so the return was not only positive but much higher than average – knowing that some companies would need to refinance at higher rates.
Leverage’s fortunes have turned so far this month, however, with all of the above-mentioned models seeing a negative return to Leverage. Also of note is that the Q4-to-date return has been most negative once again in the US and UK. Of course, it remains to be seen whether the change of heart will continue, especially if longer-term rates continue to fall, but investors may want to take note of the reversal.
We have also observed that the factor is near the low end of its 12-month range of predicted volatility in Europe and Emerging Markets, at the high end in the US, Japan, Global (Worldwide) and right in the middle in the UK and Developed Markets ex-US. Still, the factor is generally one of the lower volatility factors.
The following graph does not appear the Risk Monitors but is available on request: