Equity Risk Monitors — September 21, 2020

Equity Risk Monitor Highlights | Week Ended September 17, 2020

Risk appetites high worldwide; Health Care gains more ground in Europe; The Australian dollar rises to the top

Risk appetites high worldwide

The Market Sensitivity and Volatility style factors saw large positive returns over the past six months, suggesting investors are pushing the risk envelope. After large negative returns in March before the market bottomed out, the two factors have since become the top performers over the last six months, with the highest returns among all style factors in Axioma’s Worldwide medium-horizon fundamental model. Volatility’s return has remained relatively flat since June, after climbing in the prior two months. But Market Sensitivity has been on a continuous ascending trend since mid-April, up close to 10% last week. The turnaround helped to not only cover losses incurred by Volatility and Market Sensitivity earlier in the year, but pushed year-to-date gains for both factors into positive territory. For more details on the underperformance of Low Volatility strategies, please see the white paper Low Volatility Strategies: Why the Wheels Came Off (Temporarily) in 2020.

See graph from the STOXX Global 1800 Equity Risk Monitor as of 17 September 2020:

Health Care gains more ground in Europe

The European Health Care sector received a boost from the resumption of AstraZeneca’s clinical trials for a coronavirus vaccine last week. Given the pandemic, Health Care has not surprisingly been the second-best performing sector in Europe after Information Technology, recording a year-to-date gain of 4% as of last Thursday. Health Care also became the second least risky sector after Consumer Staples in Europe. Health Care’s weight in the European index was substantially higher than where it was six months ago. The sector’s contribution to benchmark risk, however, has remained below its level of six months ago. For more details on the increased dominance of Health Care in the European market, a trend we have observed since 2005, see blog post Health Care and Banks Trade Places in Europe.

See graph from the Developed Europe Equity Risk Monitor as of 17 September 2020:

The Australian dollar rises to the top

The Australian dollar is now the strongest currency against the US dollar, among all major developed currencies. The Fed announcement on Wednesday that it expects to hold interest rates near zero for at least three years put even more downward pressure on the US currency. All major developed currencies recorded six-month positive returns against the greenback and were positioned at or near the high ends of their six-month return ranges against the US dollar as of last Thursday. The Australian dollar’s six-month return was the highest, exceeding 20%. At the same time, all developed currencies were positioned at the low ends of their six-month volatility ranges against the greenback. The Norwegian krone remained the riskiest developed currency, followed by the New Zealand dollar and the Australian dollar.

See graph from the Equity Risk Monitors as of 17 September 2020: