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An Overview of India’s Market Today: Looking at S&P BSE Indices

Islamic Index Market Update: August 2014

Less Risk Meant Higher Returns for August

Sell Just Before, Not After, the FOMC Meets

Mid-caps: Neglected middle children of the equity universe…

An Overview of India’s Market Today: Looking at S&P BSE Indices

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Utkarsh Agrawal

Associate Director, Global Research & Design

S&P Dow Jones Indices

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The stock markets in India have performed phenomenally in the recent months.  The S&P BSE SENSEX (India’s most tracked bellwether index) has been scaling heights never seen before.  The one-year, risk-adjusted return of the index was approximately 3.53 as of August 29, 2014.  With 30 stocks, the index is well diversified across sectors.  It will be intriguing to explore the performance of the sectors with the help of S&P BSE sector indices for the one-, three-, five- and seven-year time periods ending on August 29, 2014.  All the sector indices are subsets of the S&P BSE 500, and they cover approximately 90% of the market capitalization of the respective sectors in the index, giving a good idea of each sector’s performance.

In all the observed time periods, the S&P BSE AUTO has consistently yielded higher risk-adjusted returns than the S&P BSE SENSEX.

The S&P BSE BANKEX only provided risk-adjusted returns close to those of the S&P BSE SENSEX in the seven-year time period, and it remains lower than S&P BSE SENSEX for all the time periods.

Compared with the S&P BSE SENSEX, the S&P BSE CAPITAL GOODS delivered less than 25% of risk-adjusted returns in the three-, five- and seven-year time periods, and it came close to S&P BSE SENSEX in the one-year time period.

The S&P BSE CONSUMER DURABLES provided risk-adjusted returns greater than those of the S&P BSE SENSEX only for the three-year time period.

Except for the one-year time period, the S&P BSE FMCG provided higher risk-adjusted returns than the S&P BSE SENSEX over all the other observed periods.  The S&P BSE FMCG has the most stable risk-adjusted return profile.

The S&P BSE HEALTHCARE also provided higher risk-adjusted returns than the S&P BSE SENSEX for all the time periods except for the one-year period.

The S&P BSE IT provided higher risk-adjusted returns than the S&P BSE SENSEX in all the time periods except for the one-year time period as well.

In the three-, five- and seven-year time periods, the S&P BSE METAL delivered less than 15% of risk-adjusted returns compared with the S&P BSE SENSEX.  The S&P BSE METAL remains lower than S&P BSE SENSEX for all the time periods.

Compared with the S&P BSE SENSEX, the S&P BSE OIL & GAS has given less than 55% of risk-adjusted returns in all the time periods.

The S&P BSE POWER has been hit the hardest with negative risk-adjusted returns in the three-, five- and seven-year time periods, and it remains lower than S&P BSE SENSEX for all the time periods.

The S&P BSE REALTY has also had negative risk-adjusted returns in the five- and seven-year time periods, and it remains lower than the S&P BSE SENSEX for all the time periods.

For all except the one-year time period, the S&P BSE TECK has had a risk-adjusted return profile close to that of the S&P BSE SENSEX.   The S&P BSE TECK returned almost half of the S&P BSE SENSEX in the one-year time period.

Sector Table

*S&P BSE CAPITAL GOODS; **S&P BSE CONSUMER DURABLES

Source: Asia Index Pvt. Ltd. Data as of last trading date of August 2014. Risk adjusted return has been calculated for total return indices. This chart may reflect hypothetical historical data. Please see the Performance Disclosures for information regarding the inherent limitations associated with back tested data.  Past performance is no guarantee of future results.

 

The posts on this blog are opinions, not advice. Please read our Disclaimers.

Islamic Index Market Update: August 2014

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Michael Orzano

Senior Director, Global Equity Indices

S&P Dow Jones Indices

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Islamic Indices Outperforming Conventional Benchmarks in 2014
Shariah-compliant benchmarks have outperformed conventional indices in 2014 as Financials – which are underrepresented in Islamic indices – have experienced some weakness, and Information Technology, Health Care and Energy – which tend to be overweight in Islamic Indices – have been sector leaders.

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Through August 27, 2014, the Dow Jones Islamic Market World Index gained 7.3%, while the Dow Jones Global Index gained a comparatively modest 6.0%. The effect has been particularly strong in Asia where the DJIM Asia Pacific Index has gained 9.0% year-to-date, while the Dow Jones Asia Pacific has gained just 6.0%. Key U.S and Middle-Eastern Islamic benchmarks likewise experienced similar outperformance.

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Asia Pacific and Emerging Markets Rebound After Weakness in 2013
Regional markets that fared poorly in 2013 – notably Asia Pacific and Emerging Markets – have generally rebounded and outperformed so far in 2014. Following a decline of 0.3% in 2013, the DJIM Asia Pacific Index gained 10.7% through August 27. Likewise, the DJIM Emerging Markets Index was up 10.4% over this period, following a loss of 2.2% in 2013.

GCC Markets Power Higher Despite Volatility
Middle-Eastern equity markets have been highly volatile in 2014, but have continued to power higher. The S&P U.A.E Shariah and S&P Qatar Shariah have gained 40% and 52%, respectively year-to-date through August 27 despite seeing sharp temporary drops in excess of 20% in June. Saudi Arabia has also seen strong performance in 2014 as enthusiasm over the expected relaxation of foreign investment restrictions has buoyed the country’s equity market. Through August 27, the S&P Saudi Arabia Shariah Index was up 6.5% for the month and nearly 25% year-to-date in USD terms driving a nearly 25% year-to-date increase in the S&P GCC Composite Shariah.

The posts on this blog are opinions, not advice. Please read our Disclaimers.

Less Risk Meant Higher Returns for August

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Kevin Horan

Director, Fixed Income Indices

S&P Dow Jones Indices

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In August the yield of the S&P/BGCantor Current 10 Year U.S. Treasury Index dropped by 23 basis points from 2.56% to 2.33% where it closed out the month.  Holding the 10-year alone returned 2.19% for the month and has returned 8.42% year-to-date on a total rate of return basis.

TIPS or Treasury Inflation Protection Securities also have performed well year-to-date.  The  S&P 10 Year U.S. TIPS Index has returned 8.69% year-to-date.  The performance of the 10-year TIP was slow in June and July, but picked up in August returning 0.61%.

U.S. investment grade corporate bonds as measured by the S&P U.S. Issued Investment Grade Corporate Bond Index returned 1.38% in August and have returned 7.05% year-to-date.  The pace of return is similar to 2012 when the index returned 8.86%.  When comparing the rating segments of the index, AAA bonds returned 1.70% for the month, the same return as BB bonds.  These bonds have returned 8.01% year-to-date.

The S&P U.S. Issued High Yield Corporate Bond Index had a strong August returning 1.47% for the month.   August’s return makes up for the -1.31% performance in July and is second to the February rally of 1.92% though not enough to outpace investment grade year-to-date.
US Corporate Bond August Returns

The posts on this blog are opinions, not advice. Please read our Disclaimers.

Sell Just Before, Not After, the FOMC Meets

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David Blitzer

Managing Director and Chairman of the Index Committee

S&P Dow Jones Indices

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A recent academic paper (link here, full citation below) demonstrates that day-to-day stock market returns follow a regular bi-weekly cycle tied to the schedule of FOMC meetings, the Fed’s policy unit. A rolling five day return calculated as the excess return of stocks over T-bills peaks on the day the FOMC meets and then every other week quite consistently thereafter.  The pattern goes back to 1994 when the FOMC began regular announcements of its policy adjustments.  With a series of analyses, the paper argues that the return pattern is statistically significant and would be likely to generate economically significant returns.  The analysis builds on an earlier paper that found strong positive equity returns in the 24 hours just before the FOMC releases its meeting announcement.  Since the analysis was based on all stocks traded in the U.S. using data from Ken French’s web site, implementing a strategy based on the results might require a lot of trading. However, similar results might be possible using ETFs or index futures.

The puzzle is what is generating such strong returns before the FOMC announcements?  If the announcement contained important news about monetary policy and the economy, one would expect the market move to come immediately after the announcement.  The research shows that internal meetings at the Fed follow a regular two week cyclical pattern tied to the FOMC meeting schedule. Moreover, these internal meetings include bi-weekly discussions of the discount rates set by regional Fed banks and regular economic analyses by the Fed staff.  Could information from these meeting be seeping into the markets?  The timing of other economic data, such as weekly and monthly data releases can’t explain the pattern of stock market returns.  Moreover, the Fed through its own analyses and data it gathers to support its policy making has a wealth of economic information.  One likely source is comments made to journalists with the intention of influencing the markets.  The research gives examples of news articles the appear from time to time on the front page of the Wall Street Journal or New York Times citing “Fed insiders” or “staff forecast” or suggesting that “Fed officials would welcome…”

Paper: “StockReturns and the FOMC Cycle” by Anna Cieslak, Adair Morse and Annette Vissing-Jorgenson, June 25, 2014. Second related paper: “The Pre-FOMC Announcement Drift” by David O. Lucca and Emanuel Moench, July 2013

 

The posts on this blog are opinions, not advice. Please read our Disclaimers.

Mid-caps: Neglected middle children of the equity universe…

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Philip Murphy

Managing Director, Global Head of Index Governance

S&P Dow Jones Indices

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“Middle Child Syndrome” is a psychological label for the empirical observation that middle children often do not receive as much parental attention as first and last-born siblings. But within the ashes of (relative) neglect may lay the seeds of a strong sense of independence, according to Catherine Salmon and Katrin Schumann in their book, “The Secret Power of Middle Children”[1].

Mid-caps stocks are also relatively neglected and often overlooked – to the detriment of equity investors who may miss out on holding future leaders in their respective industries before becoming better known large-cap names. The relative obscurity may be partially due to the academic focus on the size factor as a structural driver of returns. “Small Minus Big (SMB)”, as the Fama/French size factor is known, leaves no thought of “mid” as a way to drive long-term performance. Another reason may be the popularity of large-cap and small-cap benchmarks like the S&P 500 and Russell 2000. But mid-caps stocks, as a group, have some interesting characteristics. In many ways, they have the potential to offer the best of both worlds – possibly greater dynamism than grown-up siblings and more maturity than little brothers and sisters.

As it turns out, mid-cap stocks have a unique fundamental profile in comparison with large-caps or small-caps. For example, see the bar chart below showing the median of total assets among constituents of the S&P 500, the S&P MidCap 400, and the S&P SmallCap 600 indices:

Median Total Assets of Constituents

Mid-cap stocks also have performed very differently than other market segments. This is a chart of the total return index levels for the same three benchmarks:

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If you are interested in hearing more about mid-caps as a unique market segment and mid-cap indexing, join S&P Dow Jones Indices and guest panelists for a webinar on September 4, 2014.

[1] Hudson Street Press, 2011.

The posts on this blog are opinions, not advice. Please read our Disclaimers.