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Commodities in October – Waiting Patiently for a U.S.-China Trade Deal

Highlighting the S&P/BMV Index Series

Taking the Discretion out of Factor Selection: The S&P Economic Cycle Factor Rotator Index

Celebrating 25 Years of the S&P SmallCap 600®

Performance of Latin American Markets in Q3 2019

Commodities in October – Waiting Patiently for a U.S.-China Trade Deal

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Fiona Boal

Head of Commodities and Real Assets

S&P Dow Jones Indices

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The broad commodities market rose modestly in October. The S&P GSCI was up 1.2% for the month and up 10.0% YTD. The Dow Jones Commodity Index (DJCI) was up 1.9% in October and up 6.7% YTD. Gains were spread surprisingly evenly across the individual commodity markets

As has been the case all year, the star performer in the petroleum complex in October was gasoline; the S&P GSCI Gasoline was up 5.2% for the month, driven by unscheduled refinery outages in the U.S. as opposed to particularly strong consumer demand. Despite a brief pick up in prices in October (S&P GSCI Natural Gas up 3.6%), the natural gas market remains mired in oversupply, with production growth continuing to outpace domestic consumption and export opportunities. U.S. natural gas stocks have pushed above the five-year average despite lower prices and a sharp drop in the number of rigs drilling for gas.

As the annual LME Week in London came to an end, the majority of metals across the industrial complex ended higher in October on the back of trade war resolution hopes and labor strikes in Chile. The two exceptions were S&P GSCI Iron Ore and the S&P GSCI Nickel, which were down 5.9% and 2.1%, respectively, but both were still up near 60% YTD. Nickel mines in Indonesia agreed on Oct. 28, 2019, to stop nickel ore exports immediately, pulling forward the already expedited January 2020 deadline. After nickel prices moved higher by 24% in August, a period of consolidation is understandable.

Palladium outperformed in the precious metals space in October on the back of a glaring supply shortfall. The platinum to palladium ratio is at the lowest in the last 25 years, reflecting the strength of the palladium market; the S&P GSCI Palladium was up a solid 6.7% in October and up 50.4% YTD. The S&P GSCI Gold continued its slow march higher, adding 3.0% on the month and up 17.6% YTD, driven higher by catalysts such as the U.S. Fed’s third rate cut and the Diwali festival in India.

The agriculture complex continues to wait patiently for positive news on the U.S.-China trade war front. The S&P GSCI Agriculture was up 1.4% in October. China has been back in the U.S. soybean market, although to a lesser degree than before the trade war, but the two countries are still finalizing a “Phase 1” trade pact that many expect will boost U.S. agriculture exports to China, particularly soybeans. The S&P GSCI Cotton ended the month up 6.1% on concern regarding the condition of the U.S. crop due to poor weather during harvest. The newly launched S&P GSCI Skim Milk Powder also ended the month in positive territory, up 5.1%, continuing to benefit from strong global milk powder demand.

It was a mixed bag in the livestock sector in October; S&P GSCI Lean Hogs was down 9.0% while S&P GSCI Live Cattle rose 6.4%. Volatility in the lean hog market continues, as market participants flip between focusing on the devastating supply cuts caused by African swine flu in China and the export-depleting drag of the ongoing U.S.-China trade war.

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

Highlighting the S&P/BMV Index Series

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Maria Sanchez

Associate Director, Global Research & Design

S&P Dow Jones Indices

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The S&P/BMV Index Series combines the local market expertise of the Mexican Stock Exchange (the BMV) with the resources and reach of one of the most prominent independent global index providers, S&P Dow Jones Indices (S&P DJI). This productive collaboration officially began in May 2015 and adheres to international standards. The relationship also provides the opportunity to create new indices across different asset classes in the Mexican market.

The S&P/BMV Indices cover:

  • Equities: Mexico’s flagship index is the S&P/BMV IPC, with additional indices spanning across sectors, strategies, and sizes.
  • Fixed Income: Indices in this category range from tracking sovereign bonds to corporate bonds, offering different ratings based on maturities, coupon types, and currencies, as well as nominal and inflation-linked securities.
  • Volatility: The S&P/BMV IPC VIX is designed to measure the implied 90-day volatility of the Mexican stock market.
  • Multi-Asset: The S&P/BMV Mexico Target Risk Index Series comprises strategy indices that represent stock and bond allocations across a risk spectrum spanning from conservative to aggressive.

We are constantly designing new indices to serve as innovative and practical tools for local and global investors. To ensure the indices are replicable and investable, we incorporate feedback from market participants. Over the past four years, we have launched a complete suite of single-factor indices. More recently, we debuted the first multi-factor strategy, the S&P/BMV IPC Quality, Value & Growth Index. These indices could serve as the basis for financial products like ETFs, among others, to be incorporated into portfolio strategies.

In our commitment to ESG, S&P DJI has collaborated with the Consejo Consultivo de Finanzas Verdes (CCFV). This council aims to promote the financing of green projects and generate common sustainability standards for market practices in Mexico. Together, S&P DJI and the BMV selected SAM, a highly reputable Swiss investment specialist focused exclusively on sustainable investing, as the official score provider for the development of ESG-based S&P/BMV Indices.

In the ongoing global debate about active versus passive investment, S&P Dow Jones Indices has played a major role by publishing the SPIVA® and Persistence Scorecards for Latin America. These reports include historical performance measurements of actively managed equity mutual funds in Mexico compared with the S&P/BMV IPC[1] over different time horizons.

S&P Dow Jones Indices congratulates the BMV on its 125th anniversary. Our commitment to Mexico and the BMV is to continue working on new, innovative indices for the country’s markets.

For further information, visit our website: https://spdji.com/regional-exposure/americas/mexico.

[1] The reports measure the S&P/BMV IPC’s total return version, the S&P/BMV IRT.

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

Taking the Discretion out of Factor Selection: The S&P Economic Cycle Factor Rotator Index

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Karina Tjin

Analyst, Strategy Indices

S&P Dow Jones Indices

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Amid the turbulent markets of 2019, the S&P Economic Cycle Factor Rotator Index has been holding steady. The index rotates its allocation between four indices benchmarked to factors—momentum, value, quality, and low volatility—seeking to pick the relevant factor for each phase of the business cycle. The index uses a signal that is based off the Chicago Fed National Activity Index, an economic growth indicator for the U.S. In 2019 alone, the index was allocated to each of the four factors, signaling that the business cycle had some unpredictability, with almost all micro cycles covering a slowdown, expansion, contraction, and recovery.

Historically, the index has regularly cycled through each of the factors in order to adapt to changing market conditions and allocate to the appropriate factor (see Exhibit 1).[1] The most recent allocation switch occurred in June, when the index allocation changed from low volatility to value, indicating that the economy shifted from a period of contraction to one of recovery. The fact that the index remained allocated to value even after rate cuts this year in July and September tells us that this strategy works to guard against significant movements in the market. Despite the market-wide sell-off at the end of 2018, the index has recovered most of the lost value throughout 2019.

In Exhibit 2, we see that, with the exception of last year, the S&P Economic Cycle Factor Rotator Index has not always outperformed its subcomponents. However, by allocating to the different indices, the index maintains a lower risk level while still having the ability to participate in an upward-trending market. As a result, the index achieved higher risk-adjusted returns from September 2009 to September 2019 relative to its sub-components (see Exhibit 3). When we look at the index’s one-year returns, we see that the index and all of its subcomponents had negative returns; value, buyback, low volatility, and momentum had returns of -16.45%, -13.43%, -12.28%, and -2.65%, respectively. It’s evident that the rotation aspect of the index helped protect the index against larger losses, since the S&P Economic Cycle Factor Rotator Index outperformed all of its subcomponents with a return of -2.51% in 2018. Since the index was mostly allocated between buyback and momentum in 2018, we know that the index returns were mainly driven by its momentum component.

By design, the index has a 6% risk control mechanism built in that helps it maintain a constant level of volatility, which in turn enables it to participate in the upside and offer downside protection relative to the S&P 500 Daily Risk Control 5% Index. As seen in Exhibit 4, when compared with the S&P 500 Daily Risk Control 5% Index, we see that the index captured 116% of the upside and 61% of the downside. The capture ratio of 190% shows us that the up-market performance more than compensated for the down-market performance, and that the index outperformed the market overall.

The S&P Economic Cycle Factor Rotator Index has shown that it is effective for adapting to changing market conditions with its ability to allocate to different indices depending on phases of the business cycle. Over the studied period, it not only generated higher returns with lower risk, but also captured more upside and less downside in various market conditions.

[1]   The buyback allocation utilizes the S&P Buyback FCF Index, the dividend index allocation utilizes the S&P 500 Low Volatility High Dividend Index, the value index allocation utilizes the S&P 500 Pure Value, and the momentum strategy utilizes the S&P Momentum United States LargeMidCap.

 

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

Celebrating 25 Years of the S&P SmallCap 600®

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Hamish Preston

Associate Director, U.S. Equity Indices

S&P Dow Jones Indices

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Yesterday marked 25 years since the launch of the S&P SmallCap 600.  Since then, the small-cap equity benchmark delivered an annualized total return of nearly 11% and has become the basis for many investment strategies; around USD 73 billion was indexed to the S&P SmallCap 600 as of the end of 2018.  And if we assume that these indexed assets would have otherwise been given to active funds, the rising adoption of the S&P SmallCap 600 helped to save around USD 5 billion in fees between 1996 and 2018.

One of the principal reasons for the growing popularity and awareness of the S&P SmallCap 600 has been its historical performance.  Index construction matters in U.S. small-caps: the S&P 600’s profitability criterion gives it a quality bias, which helped it to consistently outperform other small cap indices such as the Russell 2000 and made it a harder benchmark to outperform for active managers.

More recently, for those seeking to take shelter from the trade winds buffeting the blue-chip, internationally diversified names leading the S&P 500, small-cap stocks can offer a safe harbor, or simply purer exposure to the U.S. economy.  Smaller stocks typically have a higher proportion of their revenues generated in home markets, and the S&P SmallCap 600 has a strong domestic bias compared to the S&P 500.  The performance of the small-cap index over the last 12 months illustrates its close connections to the U.S. economic outlook.

After concerns over U.S. economic growth and future Fed policy weighed on the S&P SmallCap 600 towards the end of 2018, higher domestic revenue exposure provided a degree of insulation from the tariffs, which, in turn, helped the index to post its best ever start to the year (+15.45% through the end of February). The index has since been tested by periodic bouts of uncertainty centering around the health of the U.S. economy, comments by Jerome Powell, and actions by the Federal Reserve.

Since it launched on October 28, 1994, the S&P SmallCap 600 has become a popular way to access the small-cap equity space.  Its outperformance over other small cap indices is a testament to the fact that index construction matters in small cap equities.  Here’s to another 25 years!

 

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

Performance of Latin American Markets in Q3 2019

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Silvia Kitchener

Director, Global Equity Indices, Latin America

S&P Dow Jones Indices

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The third quarter was a difficult one for the Latin American region. Meanwhile, it was a mixed bag for global markets—the U.S. ended on a slightly positive note, Europe on a negative one, and Japan also on a positive one, with global markets remaining nearly flat.

The S&P 500® ended the quarter up 1.7%, the S&P Europe 350® posted almost the exact opposite with -1.6%, while Japan’s S&P/TOPIX 150 was up nearly 4%. Latin America’s blue-chip index, the S&P Latin America 40, was down 6.3%. Many internal factors contributed to the region’s underperformance, including reductions in exports, contractions in the industrial and service sectors, soft labor markets, political uncertainty, a slump in commodities prices, and low consumer sentiment. External factors also weighed heavily on the region, primarily the uncertainty surrounding trade negotiations between the U.S. and China.

While all Latin American markets ended in the red for Q3 2019, when comparing with USD-based returns, we noticed that, with the exception of Argentina and Peru, all markets in the region outperformed in USD terms or were flat in local currency terms. This is an example of how currency depreciation can have an impact on performance. The biggest differences were seen in Brazil and Colombia, with the S&P Brazil BMI posting a return of -3.9% in USD but 4.2% in BRL, and, the S&P Colombia Select Index returning -5.7% in USD but a decent 2.3% in COP. Mexico’s headline benchmark, the S&P/BMV IPC, generated a -2.6% total return in USD but was nearly flat in MXN (0.2%).

Overall, most currencies in the region saw significant depreciation during Q3 2019. Argentina led the pack in the depreciation rate for the quarter, with a fluctuation of nearly 60% between the highest and lowest rates. Brazil followed with a fluctuation of 16%, and Colombia followed with a change of nearly 11%.

Interestingly, sectors seemed to offer a clearer picture of the region. It was certainly a tough quarter for most economic sectors, although we still saw defensive sectors like Health Care and Consumer Staples were still able to post positive returns. Real Estate, Consumer Discretionary, and Information Technology also ended the quarter in positive territory. The Materials sector, which includes mining companies, was the worst-performing sector, followed by Financials.

As Exhibit 1 shows, Brazil was the best performer in the region for the quarter. Not surprisingly, most of the best-performing stocks were Brazilian, with BRF S.A., a Consumer Staples company, finishing at the top of the list among the constituents of the S&P Latin America 40, which seeks to track the performance of the leading 40 companies in the region. In terms of indices, the S&P/B3 Momentum Index, which focuses on the top companies in the Brazilian market that show persistence in their relative performance, as measured by their risk-adjusted price momentum score, had the best return for the quarter at 14.5%.

In Mexico, the momentum index was also a top performer among factor strategies. The S&P/BMV IPC CompMx Short-Term Momentum Index returned nearly 4%, significantly higher than the benchmark S&P/BMV IPC’s return (0.2%). However, in Mexico, FIBRAS ruled, and the S&P/BMV FIBRAS Index had an outstanding quarter (10.5%), as much of its returns are attributable to the high yields FIBRAS generate. As of Sept. 30, 2019, the indicated dividend yield for the S&P/BMV FIBRAS Index was 8.1%.

Chile had a relatively flat quarter, with the S&P IPSA returning -0.2%. The worst performers were small-cap stocks, as measured by the S&P/CLX IGPA SmallCap (-7.1%). In terms of sectors, the S&P/CLX IGPA Consumer Staples did the worst (-8.4%). Meanwhile, the S&P/CLX IGPA Real Estate and the S&P/CLX IGPA Industrials had strong returns of 11.1% and 7.3%, respectively.

Peru and Colombia had difficult quarters, with Peru being the worst performer of the two. However, in both markets the best-performing stocks were from the Electric Utilities industry, proving the Utilities sector’s defensive potential during challenging market environments.

As we enter the last quarter of the year, many are already looking forward to 2020. Most economists’ consensus is that Latin America will continue to struggle with market volatility, stagnant economic growth, and political uncertainty. As an optimist, I think there are always investment opportunities in the short- and long-term horizon, despite the tough times. In fact, the diversity of our leading country and regional indices shows exactly that.

For more information on how Latin American benchmarks performed in Q3 2019, read our latest Latin America Scorecard.

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