Indexology^® Blog

The China PMI continued to show deterioration while the headline PMIs for other countries like South Korea, Taiwan and Indonesia also ticked down.  The market is expecting more easing to come in order to support the growth.

As of May 15, 2015, the S&P Pan Asia Bond Index rose 0.10% this month, bringing the year-to-date (YTD) total return to 2.40%, yet the individual market showed mixed performance. The S&P Indonesia Bond Index continued the slide and fell another 0.79% in May. Please see exhibit 1 for YTD and 1-Year total return performance.

On the other hand, China is the best performer of the month. The S&P China Bond Index rose 0.70% MTD and 2.85% YTD, led by the gains in the corporate bonds. On the back of the strong Chinese equities rally, the S&P China Convertible Bond Index jumped 11.4% YTD. The Chinese offshore RMB bond market, represented by the S&P/DB ORBIT Index also went up 1.94% YTD. Though the index’s yield tightened by 33bps to 4.37%, it offers yield pick-up over the onshore bond market.

Exhibit 1: Total Return Performance of the S&P Pan Asia Bond Index

Three storms are converging on the municipal bond market: supply, interest rates and bad news headlines – a powerful trio of bad news for the municipal bond market.

• The S&P Municipal Bond Illinois Index is down 1.55% for month-to-date and is the worst performing state index for the month so far.  The index is down 1.16% year-to-date.
• The S&P Municipal Bond Illinois General Obligation Index is down 2.63% month-to-date and is the worst performing G.O. index.  The index is down 3.06% year-to-date.  Chicago General Obligation bonds make up 35% of this index by market value.
• The S&P Municipal Bond New Jersey Index is down 1.07% month-to-date and is the second worst performing state index for the month.  The index is down 1.1% year-to-date.
• Puerto Rico is having a dead cat bounce in May as the S&P Municipal Bond Puerto Rico General Obligation Index is up 2.37% month-to-date.  The index remains in the red for the year so far down 0.97% year-to-date.

The combination has put a heavy weight on the investment grade tax-free bond market which has seen negative returns in 2015.  The S&P National AMT-Free Municipal Bond Index is down 0.73% month-to-date and 0.36% year-to-date.

One bright light is the municipal high yield bond market as the S&P Municipal Bond High Yield Index is up 0.82% year-to-date helped by positive performance in May by Puerto Rico bonds and a recovery over 3.2% of the Tobacco Settlement bond sector.

Most European government bond markets continued their downward spiral during the week of May11th, 2015, led by a sell-off in US Treasury markets.  New supply from the US Treasury pushed yields up (bond prices down) and aided a global downward trend.  Europe is showing its sensitivity to uncertainty over when the fed will start to raise rates.  This coupled with concerns that European bond markets are overvalued in light of the ECB’s QE expectations, and whether deflation concerns are over-hyped, are giving the market mixed signals.

European government bond markets are moving in tandem for the most part, despite conflicting inflation numbers.  While inflation is picking up in Germany and France, with consumer prices rising in both countries for the month of April YOY, Italy and Spain are seeing lower prices.   Italian CPI was down at -.1% for the month of April YOY, while Spain’s CPI is at -.7% in April YOY.  All four of these markets sold off causing yields to spike 10bps and up since Friday’s close.

Norway and Sweden did not sell off and actually rallied on Wednesday.  Swedish consumer prices declined .2%, causing concerns that Sweden will need to lower rates further.  From Friday’s close, the S&P Sweden Sovereign Bond Index yield tightened 2bps to close at .30% as of Wednesday.  Norway’s CPI for April clocked in at 2% YOY, and its bond market rallied as well.  The S&P Norway Sovereign Bond Index, initially sold off on Tuesday only to bounce back again along with Sweden.   The S&P Norway Sovereign Bond Index tightened 1bps to 1.31% for the same timeframe.

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.