Indexology^® Blog

The importance of choice is gaining ground in all areas of life.  I really resonated to the latest advertisement from Amazon, “Hindustani Dil Kahta Hai, Aur Dikhao, Aur Dikhao!” (“The Indian heart says, Show me more, show me more!”).  I would agree that choice is not only important in our day-to-day lives; it also holds true while making investment decisions.  A well-classified universe helps in avoiding confusion, as there are innumerable options to choose from and to use for setting goals or requirements.  Good and clear categorization helps simplify the process.

Indian markets have witnessed quite a movement in the past year, with a one-year return of 21.31% for the S&P BSE SENSEX (one-year annualised price return as of May 8, 2015).  When markets show such growth in a short time, analysts get busy trying to decode the trend and its attributes.  It is then that it becomes essential to have a proper market gauge.

Exhibit 1: S&P BSE SENSEX Annual Returns 

Source: S&P Dow Jones Indices LLC.  Data as of May 8, 2015.  Past performance is no guarantee of future results.  Chart and table are provided for illustrative purposes only.

It is with this intent that last month, the S&P BSE suite of indices introduced the S&P BSE AllCap.  This is a great tool for market research, as the subcategories that form this superset are clear and well-categorized segments that help provide distinct trends.  Some may be aware that S&P Dow Jones Indices already had renowned and popularly tracked indices for the Indian market, such as the S&P BSE 100, S&P BSE 200, and S&P BSE 500, which serve as benchmarks for many investment strategies and funds.  Why, then, did we create a new series?Source: S&P Dow Jones Indices LLC.  Data as of May 8, 2015.  Past performance is no guarantee of future results.  Chart and table are provided for illustrative purposes only.

As an organization, assessing market requirements and taking active feedback from market players has been always an essential part of index creation.  These two ingredients ensure that an index that is created is useful to a specific market and its participants.  The new, S&P BSE Indices are aligned to global standards and practices that broaden the horizon of creating investment products.  Globally, fund managers, investment professionals, and investors understand this classification as well.

The S&P BSE AllCap is subcategorized into five size-based indices, with the primary indices being for large-cap, mid-cap, small-cap, large-mid-cap, and mid–small-cap companies.  The index is further classified into 10 sector-based subindices.

The S&P BSE AllCap, with over 700 constituents, is a broad index covering more than 95% of total Indian market capitalization, and the index aims to be useful for broad market measurement or benchmarking.  Hence, S&P Dow Jones Indices broadened the market coverage from the existing S&P BSE 500 to 700 stocks for the S&P BSE AllCap.

For those seeking to analyse market movements across size or sectors can track the five size-based indices and 10 sector indices.

Exhibit 2: Size Subindices of the S&P BSE AllCap 

Source: S&P Dow Jones Indices LLC.  Chart is provided for illustrative purposes.

While we are using S&P Dow Jones Indices’ global methodology of 70%/15%/15% composition for the large-, mid-, and small-cap size-based indices, the sector indices conform to the BSE classification.

Exhibit 3: Sector Subindices of the S&P BSE AllCap

Source: S&P Dow Jones Indices LLC.  Chart is provided for illustrative purposes. 

These new indices are aimed at providing a tool for better analysis of market trends, as well as an accurate representation of the segments or sectors that make them ideal for new products.

Exhibit 4: Number of Stocks in the S&P BSE Size-Based Indices 

Source: S&P Dow Jones Indices LLC.  Data as of annual reconstitution in September 2014.  Chart is provided for illustrative purposes. 

Exhibit 5: Number of Stocks in the S&P BSE Sector-Based Indices 

Source: S&P Dow Jones Indices LLC.  Data as of annual reconstitution in September 2014.  Chart is provided for illustrative purposes. 

For more information on these new indices, you can log on to www.asiaindex.co.in.

When we initiated our forecast on the S&P Claims Based Indices late in 2014 we wanted to avoid the effects of the ACA on individual and small group claim costs so we focused our models on the LG/ASO lines of business. Clearly, the 2014 experience on individual shows a sharp divergence in trends from the group business.  Although the delay in the latest release caused some historic revisions in the data, the concept we outlined with our most recent forecast report seems to still be operative, although maybe somewhat muted.

We continue to expect there could be a trend bump in 2015 small group (SG) as electronic enrollment and exchanges for enrollment have become available. While enrollment is increasing, the capacity of hospitals, as measured by employment per capita, has declined below long term average levels and may be negative when compared to potential demand—when considering the impact of the increased number of newly insured. Medicare initiatives to cut readmissions and to increase longer emergency room treatment holds to avoid unnecessary admissions have been affecting both Medicare and non-Medicare hospital patients by reducing admissions.[1]

Our operative theory is that healthcare is primarily a supply driven system, due to consumers being immunized from significant cost due to the effect of insurance. This increases the demand above what it might otherwise have been in the absence of insurance. Although ongoing market increases in deductibles and co-pays have a downward effect on demand, this would only have a marginal impact relative to the effect of having no coverage at all.  This was demonstrated in the Rand Health Insurance Experiment conducted from 1971 to 1986.

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[1] Readmission rates are much higher on the Medicare population than the commercial and Medicare has seen significant admission rate reductions in recent years.  Medicare 30 day readmission rates have dropped from an average of 19.0%-19.5% four to seven years ago to under 18% in early 2014.

On May 4, 2015, the Saudi Arabian Capital Market Authority (CMA) released the “Rules for Qualified Foreign Institutions Investment in Listed Shares,” or the QFI program, setting the stage for institutional investors based outside of the Gulf Cooperation Council (GCC) to make direct investments in Saudi Arabian equities for the first time.  Although additional steps will need to be taken to further improve market accessibility in the future, the QFI program is a key step in the development of Saudi Arabia’s equity market.

The QFI rules, which are expected to become effective on June 1, 2015, require institutions to register with the CMA and meet certain qualifications based on assets under management and experience in the financial services industry.  In aggregate, all QFIs will be allowed to own a maximum of 20% of any listed company and a single QFI will be limited to a 5% stake in a single company.

Without a doubt, the QFI program marks a historic moment for Saudi Arabia’s capital markets.  Anticipation surrounding the opening of the Saudi Arabian market to foreigners has buoyed the country’s equity market over the past few years, despite a significant drop in the second half of 2014 driven by the plunge in oil prices.  As of April 30, 2015, the S&P Saudi Arabia had an annualized return of 11.3% over the past three years, widely outperforming the 2.4% return of the S&P Emerging BMI and even beating the 10.8% return of the S&P 500^®.

S&P Dow Jones Indices calculates and publishes more indices than any other provider for the Saudi Arabian market and throughout the GCC.  Through our acquisition of the International Finance Corporation (IFC) Indices in 2000, we have been calculating Saudi Arabian equity indices since 1997.

In addition to our flagship S&P Saudi Arabia Index, we publish various size, sector, and industry subindices that are designed to measure different segments of the market.  We also publish blue-chip indices, such as the Dow Jones Saudi Titans 30 Index, that are designed to support index-based financial products.  We also provide multiple versions of various indices reflecting the differing opportunity sets available to domestic Saudi Arabian investors and GCC nationals due to foreign investment restrictions.

As of April 30, 2015, the fixed income ETF market in China totaled CNY 8 billion; it is only 0.03% of the total market value tracked by the S&P China Bond Index.  The fixed income ETF market in China is small when comparing with that of the U.S., which totaled USD 321 billion as of the same date.

Unsurprisingly, most Chinese investors favor high-risk and high-return products.  They tend not to find the fixed income assets appealing, especially after the recent China stock rally.  However, Chinese investors often overlook the risk component.  As of April 30, 2015, the three-year annualized risk of China’s equity market¹ is 19.5% versus 2.77% of Chinese fixed income, represented by the S&P China Bond Index.

Despite the differences in the regulatory landscape and product demand, we believe the China ETF market could learn from the growth seen in the U.S. ETF market as follows:

1. Investor Education: Fixed income is considered a core asset class in the U.S.  It diversifies portfolio risk and plays an important role in asset allocation.  In order to build up retail investor participation in ETFs, Chinese investors should also learn about why and how they would be benefited from ETFs and passive investing, including cost effectiveness, flexibility, and diversification.
2. Product Variety: Compared with the limited product types in China, the U.S. has a robust suite of product offerings, including sovereign bonds, corporate bonds, municipal bonds, inflation-linked bonds, convertible bonds, etc.  There is a strong growth potential for both the number and the type of fixed income ETFs in China in the coming years.
3. Usage of ETFs: ETFs can not only be used for exposures and hedging tools, they can also be used as building blocks for strategic asset allocation or liquid instruments for tactical positions.  However, this is dependent on further improvements in underlying liquidity.
4. Fixed Income Index (Benchmark) Practices:  The International Organization of Securities Commissions (IOSCO) publishes the Principles for Financial Benchmarks.  It is essential for an index provider to adopt  governance practices that address conflicts of interest and promote transparency.  Meeting investor demand and building investor confidence are  essential to the development of the ETF market.

¹China equity is represented by the S&P Total China BMI (USD).

China continues to broaden foreign investor access to their onshore bond market. Luxembourg is the latest country being granted an RQFII quota by the People’s Bank of China, followed Canada, Germany, Qatar and Australia.  According to the data published by State Administration of Foreign Exchange (SAFE) on April 29, 2015, the approved RQFII investment quota reached CNY 363 billion, representing a 22% increase from December, 2014. The number of the qualified institutions also rose from 93 to 121.

Among the qualified participants, Hong Kong remains to be the biggest player, with an RQFII quota allocation of around 74%, see exhibit 1 for the country breakdown. Outside of Hong Kong, the most significant development observed was by South Korea, with its approved quota jumping 10 times to CNY 30 billion, while the number of the qualified institutions climbed from 1 to 14 since last December.

In sync with the opening up of its capital markets, the China onshore market has recorded substantial growth in recent years. Tracked by the S&P China Bond Index, the market value of the China onshore bond market reached CNY 28 trillion, as of April 30, 2015. This market has expanded 22% since last year and more than three times since the index first valued on December 29, 2006. The market value tracked by the S&P Japan Bond Index, representing the other giant market in Asia, gained 2.6% and 37% respectively.

In terms of total return performance, the S&P China Bond Index rose 2.14% year-to-date (YTD), after a 10% gain in 2014.  Global investors seem to continue to favor Chinese bonds as they offer relatively higher yields as compared to markets globally. The index’s yield-to-maturity currently stands at 3.91%, compared with 0.27% yield-to-maturity from the S&P Japan Bond Index. Please see exhibit 2 for indices comparison.

Exhibit 1: Country Breakdown of the Approved RQFII quota from State Administration of Foreign Exchange (SAFE)

Exhibit 2: Indices Comparison

Source: S&P Dow Jones Indices. Data as of April 30, 2015