Equity Risk Monitors — September 10, 2021

Equity Risk Monitor Highlights | Week Ended September 9, 2021

  • US small caps far riskier than large caps
  • Japanese stock rally drives risk up
  • Momentum shines in Emerging Markets

US small caps far riskier than large caps

While both US large and small-cap indices have seen sharp declines in risk since the beginning of the year, the risk of large caps has fallen more rapidly, making small caps much riskier relative to large caps. The gap between short-horizon risk forecasts for the US small and large caps has widened from 4 percentage points at the end of 2020 to 7 percentage points last week. Despite last week’s drop in US stock prices, risk forecasts for both large and small cap indices continued to shrink, as measured by Axioma’s US All Cap and US Small Cap fundamental short-horizon models, respectively.

As of last Thursday, small caps were 70% riskier than their large cap counterparts. This relative level of riskiness of small caps at the short-horizon has not been seen since 2017, when the ratio between small and large cap risk reached a 20-year record at 1.8. Investors making a small-versus-large cap decision may want to keep this relative disparity in risk in mind, as it suggests the need for more conviction in relative return forecasts.

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

Japanese stock rally drives risk up

Japanese stocks continued to rally last week, following Prime Minister Yoshihide Suga’s decision to not seek re-election as ruling-party leader. The STOXX Japan 600 index rose 4% over the past five business days alone, recording a year-to-date return of 16% as of last Thursday. At the same time, short-horizon risk for the Japanese index spiked, according to Axioma’s Japan fundamental model.

Risk for the STOXX Japan 600 index jumped nearly 200 basis points last week, making Japan the second-riskiest geography after China. Needless to say, such jumps in risk typically occur when stock prices fall, not rise. Japan’s risk of 15% now surpasses that of Asia-Pacific ex-Japan and Emerging Markets.

See graph from the Japan Equity Risk Monitor as of 9 September 2021:

Momentum shines in Emerging Markets

Momentum has performed quite well over the past six months in Emerging Markets, pushing the factor’s one-year return above those of all other market-based style factors in Axioma’s Emerging Market medium-horizon fundamental model. Emerging Markets Momentum six-month return exceeded two standard deviations of the expectation at the beginning of the period. Momentum’s six-month return was also positive in Axioma’s Worldwide model, but Momentum’s Worldwide 12-month return was less than a third that of Emerging Markets Momentum, due to earlier losses.

See graph from the Emerging Markets Equity Risk Monitor as of 9 September 2021

For more insights and research from the Applied Research team, please click here.