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REITs Rising Up

How the Brexit Affected Rates and Currencies in LatAm

The S&P 500® Dynamic Gold Hedged Index Increased in Reaction to Friday’s Brexit Vote

Navigating Brexit

Gold Shines With Its Biggest 2-Day Gain Since 2011

REITs Rising Up

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David Blitzer

Managing Director and Chairman of the Index Committee

S&P Dow Jones Indices

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REITs used to be seen as step-children – unusual securities with special tax treatments and slightly different accounting. Some investors weren’t sure if REITs were really common stocks. Then in 2002 for the first time a REIT was added to the S&P 500. That recognition attracted attention and investors began to see REITs as a bit more main stream. As housing began to boom in the early 2000s, real estate was more widely talked about. While some people were buying second and third homes as investments, a few others were focusing on buying real estate on the stock market with REITs or real estate development companies.

Analysts following REITs use GICS, the Global Industry Classification Standard, and track REITs and real estate as part of the financial sector.  GICS classifies all publicly traded companies into sectors, industry groups, industries and sub-industries.  While housing and home ownership went through a boom and a bust, REITs and real estate equities continued to garner increasing attention from investors. In the last few years with very low interest rates, REITs have enjoyed renewed attention due to their attractive dividend yields.  The chart shows the weights of real estate and non-real estate financials in the S&P 500 and the continuing growth of the soon-to-be new real estate sector in GICS.

Source: S&P Dow Jones Indices, Monthly data
Source: S&P Dow Jones Indices, Monthly data

The rise of REITs did not go unnoticed by S&P Dow Jones Indices and MSCI during their annual reviews of the GICS structure.  In recognition of the growing importance of these stocks, a major change is coming: in September real estate development companies and REITs will leave the financial sector behind and become a new 11th sector in GICS. This is the first time since GICS was introduced in 1999 that a new sector is being created. For investors in REITs and real estate developers and for issuers of these securities, this will be a major change.  REITs will have more prominence as the weights of REITs in the S&P 500 and other major indices become more widely recognized.

Many portfolio managers and mutual funds compare their equity asset allocation against the current 10 sectors in GICS.  When real estate becomes its own sector, these portfolio managers may be busy rebalancing to assure their real estate exposure isn’t too far from the benchmark.  The table shows what the S&P 500 would look like were REITs a sector today.

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Source: S&P Dow Jones Indices, Data as of June 30, 2016

Need more information? S&P Dow Jones is hosting a webinar next week on GICS, REITs and real estate.  The link is here.

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

How the Brexit Affected Rates and Currencies in LatAm

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Jaime Merino

Director, Asset Owners Channel

S&P Dow Jones Indices

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After Brexit polls said that the referendum would end with a stay in the European Union (EU), all markets reacted as if that would be the outcome on voting day.  After the announcement that the U.K. would no longer be part of the EU, all markets were shocked, and the emerging markets of Latin America suffered consequences as well.

Exhibit 1 shows the movement on yield in bps between June 22-23, 2016, and June 23-24, 2016, in different parts of the sovereign curve for Brazil, Chile, Colombia, Mexico, and Peru.

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On average, Chile was affected the least in terms of movements in its sovereign curve.  In contrast, Peru had a significant gain in prices in the long part of its curve, but the day after the vote it returned to normal.  Brazil also saw gains before the referendum, and the day after the vote it stayed flat.  Mexico had gains in all parts of the curve on the day of the vote and the next day it closed with upward movements in the short end of the curve, following a possible hike in policy rate by the country’s central bank, there was an upward movement of 50 bps on Thursday, June 30, 2016.  Another budget cut of MXN 31,700 million was announced.

On the FX side, we have seen many movements since the vote.  Exhibit 2 shows the percentage change of the spot prices against the U.S. dollar between June 22-23, 2016, and June 23-24, 2016.

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In all cases, Thursday’s close presented an appreciation of most currencies against the U.S. dollar; Mexico’s currency benefited the most, with an appreciation of 1.14%.  However, one day later, it was the most negatively affected of the currencies in Exhibit 2, closing with a depreciation of 3.01%—at midnight local time, it was down more than 7%.

In contrast with currencies, real rates, as measured by the regional components of the S&P Global Emerging Sovereign Inflation-Linked Bond Index, had varying movements between each country.  Exhibit 3 shows the daily returns of the inflation-linked indices of each country, with Chile and Colombia flat, Mexico with positive returns on both days, and Brazil and Peru with losses on Thursday and gains on Friday.

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

The S&P 500® Dynamic Gold Hedged Index Increased in Reaction to Friday’s Brexit Vote

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Tianyin Cheng

Senior Director, Strategy and Volatility Indices

S&P Dow Jones Indices

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Gold often rallies in times of intense market turmoil, as the safe-haven asset is perceived as a hedge against economic and financial risk.  This was one of the rationales for constructing the S&P 500 Dynamic Gold Hedged Index.  What happened on Friday, June 24, 2016, clearly demonstrated the effectiveness of the strategy in terms of providing diversification when it is most needed.  On that single day, the S&P 500 (TR) returned -3.59% (the 50th largest single-day drop in the past 30-year period), while the S&P 500 Dynamic Gold Hedged Index returned 0.91%.  Would this happen again if Trump were elected president of the U.S. in November?  That would be interesting to see.

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In addition to the potential diversification benefit, the S&P 500 Dynamic Gold Hedged Index could possibly protect portfolio returns from the effects of currency devaluation.  This is especially relevant with the current market conditions, as some market participants might conclude that central banks could respond to the Brexit vote by adding more monetary stimulus.  In the immediate aftermath of Brexit, the Bank of England said it was well prepared and ready to provide an additional GBP 250 billion in liquidity.

Another thing to note is that the S&P 500 Dynamic Gold Hedged Index is designed to reflect the strategic overlay approach that may provide a more efficient way to gain exposure to gold.  The approach pairs a core investment (the S&P 500) with a portfolio hedge applied through a derivative instrument (gold futures).  With this approach, market participants do not need to cut their equity exposure in order to increase their holdings in gold.  As a simple illustration, if a market participant sold 50% of their S&P 500 holdings and bought into GLD ETF, this 50/50 portfolio ETF would have generated a return of 0.66% Friday, June 24, 2016, 25 bps lower than that of the S&P 500 Dynamic Gold Hedged Index, and this does not include transaction costs.

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

Navigating Brexit

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Tim Edwards

Managing Director, Index Investment Strategy

S&P Dow Jones Indices

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Despite some warnings from volatility gauges, the market had “priced in” a vote for remain from the UK’s population.  This has made for some dramatic headlines, and large movements since the vote to leave the EU was announced.  As the market scrambled to make sense of the political chaos, three key themes have emerged from the market’s reaction.  

  1. Higher Volatility

The past few days have seen a rapid repricing in European markets, causing volatility to increase.  While volatility tends to rise precipitously, it tends to fall much more gradually.  Moreover, the political crisis triggered in the UK by the Brexit vote, and the general record of the EU in solving difficult negotiations, provides grounds to suppose this time will prove no exception.Pic 1 BrexGiven the general sentiment, it is notable that the UK’s equity market is not far at all from where it was only three months ago, at least, in pound sterling terms.  One reason that the market has held up so well is due to the fall in the value of the British pound: for the large multinationals that make up a significant proportion of the local exchange, a cheaper pound inflates the relative value of their considerable foreign revenues.  The chart above shows a very different picture for investors calculating their returns in a different home currency.

  1. The Pound and the Euro are the battlegrounds

Much of the trading activity around the UK’s referendum and its putative consequence has focused on the pound sterling.  This is both a European and UK crisis; both currencies have come under pressure.  For international investors, the use of currency hedged equity indices can mitigate the volatility of investments that arise from such fluctuations.  As the chart shows, European or U.S. investors in the UK markets could have more or less mimicked the returns of local investors during  the period.  However, those who did not hedge the currency faced material losses:Pic 2 Brex

And in a broader environment where central banks globally continue to face the temptations of a race to debase, currency hedging offers a way to limit the impact of macro-economic policy missteps, too.

  1. Higher Dispersion among Sectors than Countries

Along with volatility, dispersion is also rising.  However, at least for the moment, the changing economic outlook and opportunity set has driven a wider spread of dispersion among sectors than countries.  Wherever they are based, European Financials face the potential for material disruption from a Brexit, while Energy companies and Consumer Staples have so far been largely untroubled.  If this trend were to continue, then the opportunistic investor should calibrate their views to which sectors might benefit, rather than which countries.

Pic 3 Brex

Should I stay or should I go?

Of late, Europe’s political class has maintained a far-from spectacular record in the speedy resolution of crisis.  Faced by a market whipped by political uncertainty and facing an interminable period of months and perhaps years before a definite outcome, investors may be tempted to avoid Europe and the UK altogether.  Indeed, as the recent steep falls demonstrate, many already have.

Those who remain might well prepare for higher volatility, and might consider currency hedged versions of investments where appropriate.  Finally, and despite the seeming importance of national distinctions to current events, so far it has mattered less whether stocks are based in the core, periphery or edge of Europe.  Investors may be wise to keep a closer eye on sectors, than countries.

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

Gold Shines With Its Biggest 2-Day Gain Since 2011

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Jodie Gunzberg

Managing Director, Head of U.S. Equities

S&P Dow Jones Indices

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According to my colleague, Howard Silverblatt, Senior Index Analyst, “The S&P 500 posted a $317.2 billion fall, after Friday’s $656.9, making the two-day fall $974.2 billion – the third worst on record.  The 2-day point drop of 112.79 was the second worst point drop on record, and on a percentage basis, the 5.37% decline for 2-days is ranked 154.”  Sounds like a bad two days for the stock market and understandably so from the uncertainty of Brexit.

In the meantime, The S&P GSCI Gold Total Return gained 4.9% on Jun. 24-27, 2016, the most in two days since Aug. 8-9, 2011.  It is ranked the 31st biggest 2-day gain out of 7,644 and of these 31 times gold returned this much, the S&P 500 was only positive 10 of the times.  On the other hand, when the S&P 500 lost as much as 5.4% in 2 days in history the average drop was 7.2%, while gold gained 0.4% on average during these down stock market days.

Now may be a good time for gold and gold miners not only for it’s diversification properties but for its ability to hold up to a strengthening dollar and that it is seasonally a good time for gold.  Gold holds up well independently of the stock market. It also rises 32.5 basis points on average for every 1% the dollar rises, even though it rises much more, 3.5% for each 1% the dollar falls. Last, the 3rd quarter is historically the best for gold, gaining 4.7% on average, which is 40 basis points more than the S&P GSCI index in past 3rd quarters.

Source: S&P Dow Jones Indices
Source: S&P Dow Jones Indices.

Here are some thoughts from a recent Bloomberg radio appearance about Brexit on commodities including gold and North Sea Oil. Also here is why the relationship between Scotland and England matters for Brent Oil.

For the inside scoop, and for anyone having trouble tuning in, here are my notes to the radio producer about Brexit on commodities:

1. Fundamentally, it is too early to tell the impact of Brexit on commodities. Basically supply and demand should not change in the short term, but if Great Britain’s independence strengthens their productivity in the long run, the impact should be positive.

Interest rates and the dollar
Two potentially positive impacts on commodities would have been rising interest rates and a falling dollar. However the likelihood of either happening now is less so that is a bad sign for commodities.

Market Risk
Brexit is and may continue to drive market fear that bleeds across risky assets.

When this happens, commodity investors typically pull out since they don’t feel like they are getting compensated for the risk to “sell insurance” in the futures markets. The result is increased volatility and then a drop and open interest which is actually a force to make suppliers pullback that can drive up commodity prices in the long term despite short-term pain.

How to play
Right now the dollar strength and summer are the two key factors for commodities. Luckily the rising dollar doesn’t hurt commodities as much as a falling one helps; however, energy and industrial metals get hurt most. That said, gold, sugar and cattle tend to rise regardless of the dollar direction.
Hot weather in the summer is the other main factor driving commodities right now and q3 is typically best for the asset class. Historically unleaded gasoline, crude oil, precious metals and wheat do best in summer.

This may be time for gold
What is interesting is Brexit may be the cherry on top of the volatility crisis that will drive up gold.  Gold has always been a diversifier, with nearly zero correlation to the stock market and protects nicely. In history when the S&P 500 has fallen more than 10%, gold has gained about 60% of the time rising about 3% per month. Also if stocks fall more like 20% then gold gains more than double returning about 6.5% monthly. This plus its positive performance with the rising dollar and its best quarter coming, could drive it gold higher than in prior index history (gold levels at about $1800) given we haven’t seen an event like Brexit before.

 

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