Investment Themes

Sign up to receive Indexology® Blog email updates

In This List

Introducing the S&P Global 1200 Communication Services Sector

India Targets Better Environmental Performance

Dow Jones Sustainability Indices Continue to Raise the Corporate Sustainability Bar

How Important Are Earnings Revisions Signals for Fundamental Factor Strategies in Asia?

Price-to-Rent as an Overvaluation Metric

Introducing the S&P Global 1200 Communication Services Sector

Contributor Image
John Welling

Director, Equity Indices

S&P Dow Jones Indices

two

The S&P Global 1200 can’t stay the same. Along with the S&P 500® and other headline indices from S&P DJI, many companies within the S&P Global 1200 will be given new sector assignments due to the upcoming Sept. 24, 2018, GICS® updates.

The most visible change will be the renaming of the Telecommunication Services sector to Communication Services. The sector will subsequently be expanded to reflect the evolving way that people communicate and access information. Media companies will no longer be part of Consumer Discretionary and will instead fall within Communication Services. Likewise, home entertainment and internet companies will also be moved from Information Technology in order to join the newly named sector. On the whole, the revised sector will more fully encompass companies that focus on communication infrastructure (internet, broadband, cellular, broadcast, cable, and land lines) and content (information, advertising, entertainment, news, and social media).

The S&P Global 1200 represents approximately 70% of global market capitalization as a composite of seven widely used headline indices including: the S&P 500, S&P Europe 350, S&P/TOPIX 150, S&P/TSX 60, S&P/ASX All Australian 50, S&P Asia 50, and S&P Latin America 40.

Taking a peek at the new GICS assignments that will take place on Sept. 24, 2018, Exhibit 1 shows the 20 largest companies within the S&P Global 1200 which are being reassigned sectors. Among current S&P Global 1200 constituents, 69 companies in total are being reassigned to Communication Services, while one company (EBAY) is being reassigned from Information Technology to Consumer Discretionary. The moves will affect the weights of the three sectors mentioned.

Exhibit 2 illustrates the current and pro-forma GICS sector weights of the S&P Global 1200, pointing to a 6% increase in the representation of Communication Services, a decline of just over 2% in the weight of Consumer Discretionary, and a 4% reduction in the representation of Information Technology.

Finally, in Exhibit 3 the pro-forma index level history of the Communication Services sector was created via a hypothetical back-test. A performance comparison of the current Telecommunication Services sector and the pro-forma results of the newly named Communication Services sector illustrates the performance contribution of the newly added constituents within the realigned GICS sectors of the S&P Global 1200.

For additional information on this topic, see recent blogs here and here by colleagues Jodie Gunzberg and David Blitzer.

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

India Targets Better Environmental Performance

Contributor Image
Neil McIndoe

Head of Environmental Finance

Trucost

two

India regained its status as the world’s fastest-growing major economy at the end of 2017, posting a growth in GDP of 7.2%. Its population of 1.3 billion is also growing fast, as the country added 15 million people last year.

Although welcome in their own right, these growth rates raise significant problems for the natural environment on which India’s people and economy depend.

According to the latest data from the World Health Organization,[1] 11 of the world’s 20 most polluted cities are in India, and poor air quality is the cause of almost 600,000 premature deaths annually. Reducing levels of groundwater is a serious threat to both food security and farming jobs. In May 2016, Phalodi in Rajasthan recorded a temperature of 51 degrees Celsius—the highest ever in the country.[2] The increasing strength of heat waves are a wakeup call to the real challenges that global warming engenders.

These environmental problems could have significant financial consequences. In India, the World Bank estimates that natural capital degradation costs USD 36 billion-USD 124 billion (equivalent to 2.6%-8.8% of the country’s 2009 GDP) annually.[3] The report considers the damage costs of urban air pollution, inadequate water supply, poor sanitation, and hygiene and agricultural damage—from soil salinity, water logging and soil erosion, rangeland degradation, and deforestation.

Research by Trucost[4] has found that Indian banks are financing business sectors with environmental costs equivalent to almost three times the credit provided to those sectors.

It is clear India’s present economic course is not sustainable and needs to change. Carbon emissions is one key area of focus.

India ratified the Paris Agreement, and its intended nationally determined contribution (NDC) is to reduce the emissions intensity of GDP by 33%-35% by 2030 to below 2005 levels.

This is an ambitious target, but as anyone who has tried dieting will know, setting targets is easier than achieving them. According to the Center for International Climate Research in Norway, India’s CO2 emissions actually grew by an estimated 4.6% in 2017.[5]

Currently, India does not apply a cost to carbon emissions, and while a number of leading companies employ shadow pricing, it is hard to see India’s NDC being achieved without a tax or emissions trading scheme.

In the absence of strong government action, it is important for financial institutions to step up to the mark. They should acquire more detail on sector exposure to natural capital risks as a priority. If banks and investors take account of natural capital in their decision-making processes, that in turn will encourage companies to measure, manage, and improve their environmental performance.

[1]   WHO Global Urban Ambient Air Pollution Database (update 2018).

[2] B.P. Yadav, a director of the Indian Meteorological Department

[3] The World Bank – Policy Research Working Paper 6219 An Analysis of Physical and Monetary Losses of Environmental Health and Natural Resources in India

[4]   Harvey, L., Colina, L., Ravi, A., and Tarin, M. “Natural Capital Risk Exposure of the Financial Sector in India.” (Trucost 2015)

[5]   India’s emissions, while growing, are low on a per capita basis. In 2012, they were only 1.5 metric tons per capita versus the UK at 8.4 (Source: HSBC, BP Statistical Review 2013)

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

Dow Jones Sustainability Indices Continue to Raise the Corporate Sustainability Bar

Contributor Image
Manjit Jus

Head of ESG Ratings

RobecoSAM

two

Today, S&P Dow Jones Indices and RobecoSAM announced the results of the annual rebalancing of the Dow Jones Sustainability Indices (DJSI). The DJSI World will be celebrating its 20th anniversary in 2019, making it one of the longest-running sustainability benchmarks in the world. Even after nearly 20 years, the index has lost none of its luster and has seen nearly 1,000 of the world’s largest corporations actively complete RobecoSAM’s Corporate Sustainability Assessment (CSA) in 2018—marking yet another record in participation.

Participation has grown steadily since the indices were first launched in 1999, at a time when the concept of sustainable investing was still very much in its infancy. The annual September rebalancing has since been penciled in as a key date in companies’ corporate sustainability calendars, and it continues to receive the attention of company boards, executive management, and media from around the world. Today, more than ever, recognition for corporate sustainability efforts serves as a key differentiator for companies vis-à-vis their employees and future talents, customers, and—increasingly—investors. The DJSI serve as an important external verification of companies’ efforts on pressing sustainability topics and validation that their approach is business-oriented and more than just greenwashing.

The CSA methodology, which forms the basis for assessing companies and creating the ratings that flow into the index selection, is updated every year to reflect current sustainability challenges and future sustainability trends. In 2018, RobecoSAM added topics to its Corporate Governance criterion—adding topics such as Family & Government Ownership and Dual Class Share Structures.

In 2014, the CSA was one of the first corporate sustainability methodologies to include questions about how companies approached the topic of taxation. Since then, corporate taxation and tax transparency have taken center stage in the sustainability arena, and many companies have a stance on the topic. This year, it was time to test and see whether companies are indeed following the policies they laid out. A new question on companies’ Effective Tax Rate was introduced to determine whether companies are paying significantly less taxes than expected, without any reasonable explanation, and consequently penalizing those that are paying up.

Furthermore, new questions on Biodiversity were also added this year, and the Climate Strategy criterion was revamped to align with major changes made by CDP, with whom RobecoSAM maintains a long-standing collaboration. Most importantly, the changes in the Climate Strategy criterion introduced important concepts recommended by the Task Force for Climate-related Financial Disclosures (TCFD)—a framework that is set to significantly influence company climate disclosures in the coming years and has drawn a lot of attention from investors.

We look forward to engaging with companies on these new topics over the coming months through dialogues, round tables, and a series of webinars explaining the major methodology and scoring changes. The percentile ranks of all assessed companies will be available free of charge to all users of the Bloomberg Professional platform—providing access to investors around the world who are interested in exploring RobecoSAM’s ESG ratings.

For more about the Dow Jones Sustainability Indices and the Corporate Sustainability Assessment, visit www.robecosam.com/csa

 

 

Important legal information: The details given on these pages do not constitute an offer. They are given for information purposes only. No liability is assumed for the correctness and accuracy of the details given. The securities identified and described may or may not be purchased, sold or recommended for advisory clients. It should not be assumed that an investment in these securities was or will be profitable. Copyright© 2018 RobecoSAM – all rights reserved.

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

How Important Are Earnings Revisions Signals for Fundamental Factor Strategies in Asia?

Contributor Image
Utkarsh Agrawal

Associate Director, Global Research & Design

S&P Dow Jones Indices

two

In our previous blog, “The Hunt for Value With High Earnings Expectations in Asia,” we discussed how a simple sequential earnings revision screen historically delivered positive return alpha over the value screen in the majority of markets. The value screen was constructed based on the average of three underlying factors: book value-to-price ratio, earnings-to-price ratio, and sales-to-price ratio. Since the Asian market is highly fragmented and the distribution of each underlying factor may be different, we examined the earnings revision screen overlay on each underlying factor for both value and quality in our new research paper, “Earnings Revision Overlay on Fundamental Factors in Asia.” For quality, the underlying factors are: accrual ratio, financial leverage ratio, and return on equity ratio.

The earnings revision screen overlay on fundamental factors was done in two steps. First, we selected the top quartile of stocks by each fundamental factor from the base universe. Next, we dropped the bottom quintile of stocks by earnings revision from the stocks selected in the first step. We tested two earnings revision measures: the six-month change in the EPS estimate and the six-month diffusion of the EPS estimate. EPS diffusion was computed as the number of upward revisions minus the number of downward revisions of EPS estimates, divided by the total number of EPS estimates.

Let’s take a closer look at some of the broad market highlights from the paper.

  1. Over the entire back-tested period from March 31, 2006, to March 31, 2018, the earnings revision-screened factor portfolios outperformed their respective comparable underlying factor portfolios across the majority of Pan Asian markets (see Exhibit 1).
  2. The earnings revision screen also lowered the risk of the fundamental factors significantly across the majority of markets over the same period.
  3. During down market periods, the earnings revision-screened factor portfolios outperformed their respective comparable underlying factor portfolios across the majority of markets.
  4. The earnings revision screen did not introduce a strong sector or size bias in the fundamental factor portfolios constructed from the respective broad market universe.
  5. Among various Asian markets, the earnings revision overlay generated the most significant excess return in Australia and Hong Kong for the majority of fundamental factors (see Exhibit 1).

The results of our research suggest that the signals from earnings revisions are important even for fundamental factor strategies, since the earnings revision-screened factor portfolios reduced the risk and enhanced the return of the comparable factor portfolios, historically, across the majority of markets.

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

Price-to-Rent as an Overvaluation Metric

Contributor Image
Frank Nothaft

Executive, Chief Economist, Office of the Chief Economist

CoreLogic

two

Market Conditions Indicator and price-to-rent can locate overheated metros

The S&P CoreLogic Case-Shiller Index has documented that home prices have risen in all metropolitan areas over the last few years.  While price gains vary considerably across urban markets, some places have had especially rapid appreciation that put values above their pre-Great Recession peak, even after controlling for inflation.  Examining the markets included in the 20-City Composite, all 20 markets are up substantially from their trough, 10 markets have surpassed their pre-Great Recession peak, and 5 have surpassed the earlier peak after inflation adjustment.[1]  With prices setting new records, it’s natural to wonder whether the housing market is on the verge of another valuation bubble.

The CoreLogic Market Conditions Indicator provides a gauge to identify urban areas that may be overheating.  The Indicator is based on straightforward intuition: home prices should generally rise in line with income growth of local residents.  If prices grow too fast, then homes are less affordable and price growth should slow while incomes catch up.

The Market Conditions Indicator found that 34 percent of MSAs in the U.S. were potentially ‘overvalued’ by this metric in May.  (Exhibit 1) The last time that one-third of metro areas were overvalued in a rising price environment was Spring 2003.  While many metros were frothy 15 years ago, the valuation bubble was still localized and not national; however, rapid price growth during the following three years led to 68 percent of markets overvalued by 2006.  Thus, while we do not have a national valuation bubble today, continued rapid price growth raises the specter of a new bubble forming within the next few years.  For metros that the Indicator has flagged as ‘overvalued’, it’s important to look at other metrics for confirmation.  A price-to-rent ratio can provide additional perspective on whether prices are out of sync with valuation fundamentals.

To construct a price-to-rent ratio we used the S&P CoreLogic Case-Shiller Index and the CoreLogic Single-family Rent Index, set the ratio equal to one in the first quarter of 2001 when homes were fairly valued in nearly all metros, and observed how the ratio has evolved to today.[2]  That ratio shows that home prices have grown more quickly than rent in most metro areas, which would provide confirmation of overheated values if cap rates had remained roughly the same, but they haven’t.

A cap rate is used by real estate professionals to convert net operating income on an investment property into a market value.[3]  While a cap rate is relatively stable over short time periods within a metro area, cap rates will vary across metros and over a long period will fluctuate based on the level of long-term interest rates, the perceived riskiness of real estate investments, and tax code changes that affect real estate profitability.  Of these three factors, the one that has changed the most between 2001 and today has been the level of long-term interest rates.  Consequently, cap rates for single-family rental homes are down significantly since then.  The cap rate decline implies that the price-to-rent ratio would need to grow by more than 60 percent since 2001 before today’s prices are disconnected with rental income fundamentals.

When we examined select metros that the CoreLogic Market Conditions Indicator found to be ‘normal’ in 2001, we found that price-to-rent ratios were up by more than 60 percent in the Los Angeles, San Francisco, West Palm Beach and New York metros; of these, all but San Francisco were places that the Indicator had flagged as overheated today (Exhibit 2).  Metro areas that the Market Conditions Indicator has tagged as ‘overvalued’ and have a high price-to-rent ratio are at heightened risk of a value correction, especially as long-term interest rates rise.

[1] The Bureau of Labor Statistics’ Consumer Price Index all items less shelter was used to adjust for inflation.  Of the places included in the 20-City Composite, Dallas, Denver, Portland, San Francisco and Seattle have real prices above their pre-recession peak, as measured by the S&P CoreLogic Case-Shiller Index.

[2] Because single-family rental homes have a median value that is less than the median value of all single-family homes, the calculations used the S&P CoreLogic Case-Shiller Low-Tier Index (not seasonally adjusted) for homes with a purchase price within the lowest one-third of the CBSA price distribution.

[3] Market value of a rental home = (Net operating income)/(Capitalization rate)

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