Equity Risk Monitors — April 5, 2021

Equity Risk Monitor | Week Ended April 1, 2021


Risk rises in the US, but nowhere else
After falling steadily this past year (except during a brief period in the fall), short-horizon predicted risk for the STOXX USA 900 began to inch up, ultimately rising more than 17% from the near-term low on February 23. While still below the level at the start of 2021, the uptick bears watching. Small-cap risk has risen by a similar proportion, and the increases in both are far higher than for any other region. In fact, UK volatility is down around 20% over the same time horizon. Not only is market risk driving the US increase, but style risk has been climbing, too. And unlike other risk components, style risk is higher than it was at year end 2020. In the US, short horizon risk remains below medium-horizon, but the gap between them has narrowed. These increases suggest that medium-horizon risk is now likely to rise, hence vigilance on portfolio risk remains important, especially for factor-based investors.

See graph from the US Equity Risk Monitor as of April 1, 2021:

Factor volatility is low compared with recent history, but not longer-term
Speaking of US factor volatility, despite the substantial decreases in many risk components over the past year, some US factors are still flirting with the high ends of their 12-month volatility ranges. Growth, Medium-Term Momentum and Volatility all fall into that category, and Liquidity is not far behind. At the same time, some factors, such as Earnings Yield, Exchange Rate Sensitivity, Leverage, Profitability and (somewhat surprisingly given the big moves in large vs. small stocks) Size have predicted risk much closer to 12-month lows. Value, the current Cinderella of the factor world, is seeing volatility in the middle of its 12-month range. That said, don’t be fooled by what appear to be lower volatility levels. Most factors saw all-time highs in their volatilities a year ago, and for all of them the current readings are still in the top decile relative to longer-term history.

See graph from the US Equity Risk Monitor as of April 1, 2021:

Value’s strength is evident across markets
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peaking of Value, it had an unusually strong first quarter. It is the only factor to produce a positive return in each of the regions we track closely. Even its cousin Earnings Yield has produced mixed results across regions. Value (book/price) returns were more than two standard deviations above their long-term averages (using the beginning-of-quarter risk estimate) in both the US (US4 model) and Japan, and closer to three standard deviations above the long-term average in the UK, Developed Markets ex-US and Worldwide models. Value had the most positive return in all regions except the US and Canada. At the same time, Size had the highest magnitude negative return (even higher in magnitude than Value) in most regions, meaning the market has been favoring small value above all else. We have seen evidence that the factor returns have translated into portfolio returns in our sample factor portfolios, and will detail that in our upcoming quarterly Insight report.

Note: The following table does not appear in the daily equity risk monitors, but will be included in our upcoming Insight webinar and report.

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