Equity Risk Monitors — November 2, 2020

Equity Risk Monitor Highlights | Week Ended October 30, 2020

Asset correlations jump ahead of US elections; Emerging Markets now less risky than Developed Markets; Emerging market currencies falter as US dollar strengthens

Asset correlations jump ahead of US elections

US stocks slid lower and correlations jumped, while short-horizon market risk rose ahead of the US elections. The possibility of new lockdown measures as COVID-19 cases accelerated in the US, combined with the failure of Congress and the White House to agree on a corona-virus-relief package, overshadowed more positive economic news last week, including an expansion of business activity, a drop in jobless claims and a sharp rise in GDP for the third quarter.

After three consecutive weeks of decline, the 20-day realized asset correlations in the STOXX USA 900 index popped last week. An increase in correlations typically reflects concerns that macroeconomic and market events are driving stock prices rather than companies’ individual characteristics, a probable reflection of the uneasiness created by the coronavirus crisis and political uncertainties. The increase in both stock correlations and stock volatility contributed to the increase in risk for the US market last week, as measured by Axioma’s US short-horizon fundamental model.

See graph from the United States Equity Risk Monitor as of 30 October 2020:

Emerging Markets now less risky than Developed Markets

As countries around the world grappled with surging coronavirus cases, Emerging Markets equities became less risky than those of Developed Markets. Developed Markets’ risk rose while that of Emerging Markets remained relatively flat last week, as measured by Axioma’s Worldwide and Emerging short-horizon fundamental models, resulting in a higher level of risk for Developed Markets. The shift stood in stark contrast with the beginning of the year, when Emerging Markets’ risk was 50% higher than that of Developed Markets. After dipping well below 1 between April and July, the ratio of the STOXX Emerging 1500 and STOXX Global 1800 short-horizon risk more recently has been hovering around 1, indicating that the risk of the two indices was very close during this period.

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

Emerging market currencies falter as US dollar strengthens

Uncertainty in markets around the world solidified the greenback’s position as a safe-haven currency, despite concerns surrounding the upcoming US election. Most emerging currencies have recorded large losses against the US dollar over the past 12 months. The Turkish lira stood out with a loss greater than 20%. The Chinese yuan, Taiwanese dollar and Korean won were the only emerging market currencies to see small 12-month gains. The Russian ruble, Mexican peso and South African rand were the riskiest emerging currencies, while the Taiwanese dollar and Chinese yuan were the least risky as of last Friday.

See graph from the Emerging Markets Equity Risk Monitor as of 30 October 2020: