Equity Risk Monitors — October 25, 2021

Equity Risk Monitor Highlights | Week Ended October 21, 2021

  • Factor volatility continues to spur US risk
  • Japan now the riskiest geography
  • Profitability’s one-year return lowest in China

Factor volatility continues to spur US risk

Rising factor volatility continued to drive US risk higher, as US stock prices marched upward last week. US investors were encouraged by strong earnings reports, while appearing to shrug off inflation worries and supply-chain disruptions. The STOXX USA 900 Index gained 3%, while the index’s risk inched up again last week. The decomposition of the change in risk from a factor model perspective revealed that higher factor volatility has been driving the increase in the STOXX USA 900’s risk over the past week, month, and three months, as measured by Axioma’s US4 short-horizon fundamental model. At the same time, factor correlations—the other potentially big contributor to risk changes—have been largely unchanged.

See graph from the United States Equity Risk Monitor as of 21 October 2021:

Japan now the riskiest geography

Japan became the riskiest among all geographies Axioma models track closely, ahead of the general election on October 31 and following the Bank of Japan’s Financial System Report last week. After reaching a year-to-date low in early September, the STOXX Japan 600 Index’s medium-horizon risk reached to 17% last week, as measured by Axioma’s Japan medium-horizon fundamental model. When looking at the major components of risk, Market risk was solely responsible for the increase in Total risk. Style, Industry and Specific risk were all relatively flat over the past couple of months.

See graph from the Japan Equity Risk Monitor as of 21 October 2021:

Profitability’s one-year return lowest in China

The Profitability style factor was the worst performer over the past year among all style factors in Axioma’s China medium-horizon fundamental model. China’s Profitability incurred most of its losses from May to August of this year and remained flat over the past couple of months. The style factor’s 12-month return of -7% was more than two standard deviations below the expectation one year ago. Profitability’s 12-month return in China was also the lowest among the Profitability factors in each of Axioma’s models. In addition, Profitability’s volatility in the China model was near the high-end of its one-year volatility range, but the factor’s risk was somewhere in the middle of the pack among the style factors in the China model.

See graph from the China Equity Risk Monitor as of 21 October  2021:

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