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China's Little (Or Not So Little) Secret

Canada’s Inflation is Heating Up For The Winter

Healthcare Trends – The Full Story

Investment Grade U.S Preferreds, 16%!

Active vs Passive: European active funds generally underperformed their benchmarks but…

China's Little (Or Not So Little) Secret

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Jodie Gunzberg

Managing Director, Head of U.S. Equities

S&P Dow Jones Indices

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Below are some quotes from the latest Oil Market Report from the IEA that may overpower Chinese slowing demand growth – even with a surprise interest rate cut.

“there is a degree of opacity”

“The Chinese administration does not routinely disclose information… thus little up‐to‐date official information is available”

“A particular uncertainty concerns the division between commercial and government storage”

“unreported stock building could be occurring at unreported commercial sites”

What are these quotes referencing? The Strategic Petroleum Reserve (SPR). Although China does not report what analysts are seeing as strategic buying on the oil price dip, (S&P GSCI Brent Crude is -31.2% off its peak Jun 19- Nov 21, 2014), the IEA guesses China added 13.5 million barrels in September as extra cargoes from Saudi Arabia, Kuwait, Iraq and Oman were imported.  This brings the 2014 YTD total to an estimated 105 million barrels of unreported stock build that is far more than the 89 mb posted in 2012 when a portion of Phase 2 SPR capacity was filled.

Now the question remains how much more capacity does China have to fill up their strategic reserve sites. Construction delays may inhibit imports but if oil prices remain low, the government may put extra resources toward speeding up the build of reserve sites.

However, it is not all about oil. China has a powerful capability to stockpile commodities and deploy resources when they need them by taking off inventory or increasing production where possible. Especially in non-perishable commodities like cotton, nickel, lead, zinc and copper.  It is easy to blame the commodity price drops (as shown in the chart below) on slowing Chinese demand but by examining a few commodities that have fallen far from their peaks, the secret becomes apparent.Source: S&P Dow Jones Indices LLC. All information presented prior to the index launch date is back-tested. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index was officially launched. Past performance is not a guarantee of future results.  Please see the Performance Disclosure at http://www.spindices.com/regulatory-affairs-disclaimers/ for more information regarding the inherent limitations associated with back-tested performance.

Source: S&P Dow Jones Indices LLC. All information presented prior to the index launch date is back-tested. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index was officially launched. Past performance is not a guarantee of future results. Please see the Performance Disclosure at http://www.spindices.com/regulatory-affairs-disclaimers/ for more information regarding the inherent limitations associated with back-tested performance.

Chinese supply is a key factor, especially in an inventory sensitive environment that is mean reverting.  Nickel, which was coined the new gold for the year, is now down 21.5% from its peak. It’s not from slowing Chinese demand nor is it from Indonesia lifting its ban. The metal is pouring out of Chinese warehouses into the LME system, and what no-one expected was that the Philippines would partner with China to lift production and exports to the extent that it has.

Also, according to the LME (London Metal Exchange), the latest zinc data suggests while demand is positive that there may be unreported stock building and that China is the key wild card. Further, they report that China is responsible for keeping the aluminum market in surplus. Last, the growth in refined output of copper is said to be driven by capacity additions and start-ups in China that is projected to lead China to have the lowest net imports in 2015 since 2008.China Copper

 

 

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

Canada’s Inflation is Heating Up For The Winter

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Kevin Horan

Director, Fixed Income Indices

S&P Dow Jones Indices

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The end of last year saw Canada’s CPI move up from the October level of 0.7 to a 1.2 for December.  Since then it has stepped up in 2014 peaking at 2.4 in June before trending back down to September’s 2.0.  In light of this, the October report of 2.4 came as a surprise to the markets.  The economy may be running faster than the central bank originally thought.

Inflation has exceeded the 2% target rate set by the central bank for 5 of the 10 months reported this year.  Given the broad nature and speed of the price increases, market participants are contemplating the timing of a central bank rate increase.  Higher interest rates slow inflation because the action reduces the amount of money in circulation.

The Bank of Canada feels confident that low interest rates are needed and that inflation is not a threat at this time.  Although reassuring, this would be something global and local investors with investments in Canada will be watching closely in the near future.  To date, the S&P Canada Sovereign Inflation-Linked Bond Index has returned 0.45% month-to-date and 13.9% year-to-date.  The index’s real yield is a 0.45% while its yield with an inflation assumption is 2.51%.  The largest year-to-date return since 2004 was the end of 2011’s return of 17.75% when CPI levels rose from 2.3 to 3.7 during the course of the year.  For the 10-year period, the index has returned 5.99%.
S&P Canada Sovereign Inflation-Linked Bond Index

 

 

 

 

 

 

 

 

 

Source: S&P Dow Jones Indices, data as of November 21, 2014

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

Healthcare Trends – The Full Story

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Michael Taggart

Consultant, S&P Healthcare Indices

S&P Dow Jones Indices

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It’s an obvious point, but having access to accurate information is a critical part of being able to manage healthcare costs for the long term. Economic commentators often talk about the increase in healthcare costs (or trends) as a single figure, but, as the S&P Healthcare Claims Indices demonstrate, the truth is that healthcare trends can vary significantly across geographic regions, among the different types of healthcare services and across different segments of the insured population. While these different trends may generally move in consistent directions, there can be significant and often long term differences in the level of trend, ie the change in costs over time, between different components.

As an example, let’s look at the healthcare trends experienced by the four census divisions over the past five years, from early 2010 through mid- 2014 as measured by the S&P Healthcare Claims Indices. Census divisions are broad measures and as the graph indicates, the medical trends across all four regional divisions were roughly consistent during the period, but that average can mask important information about the level and the timing of the trends in each region. Consider the healthcare trends in the Midwest division, which were consistently higher than the national average during 2010 and 2011, but since early 2012 have been the lowest among the four regional divisions. During the second half of 2010, trends in the Midwest averaged 120 – 150 bps above the Northeast trends, but by mid-2012, those trends were reversed, and the Midwest region trends have since remained the lowest of any division.

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These differences in regional trends over time point to the importance of looking past the average national trend to understand the specific trends that have the most impact. In particular, employers, health plans and healthcare provider systems need to establish their financial objectives using specific trend measures in order to manage their exposure to healthcare costs. Since the S&P Healthcare Claims Indices allow trends to be determined at the three-digit zip code level, it is possible to obtain and use tailored data on regional trends.

 

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

Investment Grade U.S Preferreds, 16%!

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Kevin Horan

Director, Fixed Income Indices

S&P Dow Jones Indices

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U.S. Preferred securities continue to provide healthy returns for investors.  The S&P U.S. Preferred Stock Index has returned 0.79% for the month and currently returned 13.81% total return year-to-date.

The ratings break-out between constituents of the preferred index has the S&P U.S. Investment Grade Preferred Stock Index even with its high yield counterparts at 0.83% on the month.  A current trend of risk-off from junk is reflected in the indices as the investment grades have returned 16.40% year-to-date.  High Yield as measured by the S&P U.S. High Yield Preferred Stock Index has returned 0.84% so far for the month and 12.69% year-to-date.
S&P U.S. Preferred ReturnsLike Preferreds, the difference in yield between the S&P U.S. Issued Investment Grade Corporate Bond Index and the S&P U.S. Issued High Yield Corporate Bond Index is 2.97% (5.87% vs 2.90%), up from a 1.97% back at the end of June.  The prevailing thinking is that given the different risk profiles between the asset classes, the recent level of reward (yield) does not compensate in the current economy.  Year-to-date the S&P U.S. Issued Investment Grade Corporate Bond Index has returned 6.65% of total return while the S&P U.S. Issued High Yield Corporate Bond Index has returned 4.38%.

The risk-off trend could continue for some time depending on market participant’s credit outlook in our current economic environment.  Recently announced and related to this trend was news from Standard & Poor’s Ratings group expecting the U.S. corporate trailing-12-month speculative-grade default rate to rise to 2.4% by September 30, 2015 from 1.6% in September, 2014.

Source: S&P Dow Jones Indices, data as of November 14, 2014

 

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

Active vs Passive: European active funds generally underperformed their benchmarks but…

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Daniel Ung

Director

Global Research & Design

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Euro-Denominated Equity Funds

Overall, European equity markets have continued their upward trend over the past year, despite geopolitical concerns in Ukraine and uncertainty over the ECB’s willingness to support struggling economies. It is generally believed that active management may be able to add value to investment portfolios in highly turbulent markets such as this one. However, this belief was once again found to be inconsistent with our findings.

Over the past year, about 74% of European and Eurozone equity funds did not beat their benchmarks and among all fund categories examined, the worst performing were funds invested in global markets. More than 96% of them underperformed their respective benchmarks over a five-year period.

GBP-Denominated Equity Funds

As in the SPIVA® Europe Year-End 2013 report, active GBP-denominated funds invested in U.K. equities delivered the best performance. Over a one-year period, most U.K. funds performed better than their benchmarks. However, this tremendous performance was not repeated in the international fund categories.  Most global, emerging market and U.S. active funds underperformed their respective benchmarks over one-, three- and five-year time horizons.

SPIVA Europe Chart

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