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The Rising Importance of Dividends When Earnings Slow

Emerging Markets: Enter the Dragon

The Effects of Dispersion in Carbon Intensity Scores on Carbon-Efficient Portfolio Construction

Commodities – What to Watch for in 2020

Equity Markets React to the U.K. Election

The Rising Importance of Dividends When Earnings Slow

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Kieran Kirwan

Director, Investment Strategy



  1. With Q3’s earnings season substantially complete, 2019 earnings for S&P 500 companies are expected to decline on a year-over-year basis.
  2. After several strong quarters last year, the first three quarters this year have seen marked earnings deceleration.
  3. Providing 1/3 of historical S&P 500 total returns, dividends could become important when the market may be near full valuation and corporate earnings are decelerating
  4. Indexes such as the S&P 500 Dividend Aristocrats track companies with long-term track records of continuous dividend growth. As such, funds that follow them may be worth a closer look.

 Third Quarter Earnings on Pace to Decline Again

 Through November 15, 92% of the S&P 500 constituents have announced earnings, and investors have been paying close attention. Most companies that have reported thus far have exceeded estimates, which had in many instances been guided lower. On the surface this is, of course, positive news. But when looking for year-over-year growth, a different story begins to emerge. While 2018 saw three quarters with 20% advances, year-over-year earnings growth in the first two quarters of 2019 decelerated markedly and ended flat to slightly down. As of November 15, the estimated earnings decline for Q3 2019 as compared with the same period in 2018 currently stands at just over 2%. If that turns out to be the case, when all is said and done, it would mark the third consecutive quarterly decline. Soon enough, investors will begin to ask the question of where the earnings are going to come from to support current valuations.

Decelerating Earnings Could Make Dividends More Important

In a market susceptible to fits and starts, investors remain understandably attracted to dividend strategies. Beyond the obvious appeal of a potential income stream during a time of low fixed-income yields, dividends have historically provided a sizeable slice of total-returns pie. In fact, dividends have accounted for roughly one-third of S&P 500 Total Return Index performance going back to 1960.

Interestingly, the contribution of dividends to returns has varied considerably over time. Dividends accounted for more than 72% of returns during the 1970s but less than 16% during the 1990s. So, considering their historical average around 33%, how important will dividends be going forward? A credible argument can be made that dividends are likely to represent an above-average proportion of, and be a significant contributor to, near-term returns.

The rationale behind this argument becomes apparent if we look at the relationship between dividend yield, earnings growth rate, and potential valuation changes from current levels. If: 1) one considers the market to be currently at or very near full valuation; and 2) the recent trend of flat to slightly-down earnings growth continues; then 3) it follows that dividends may indeed represent a greater-than-average portion of total returns going forward.

Dividend Growth Could Hold Even Greater Appeal

Given the potential above-average contribution to returns going forward and general investor appetite for dividends, quality companies that continuously grow their dividends could become even more appealing if earnings continue to decelerate. In particular, investors might want to look into the S&P 500 Dividend Aristocrats—high-quality companies that have not just paid dividends but grown them for at least 25 consecutive years. In fact, the Aristocrats delivered positive, if moderate, earnings growth during the first two quarters of 2019. Over time, companies that have grown their dividends like this generally have had stable earnings and solid fundamentals.

There are several indexes tracking long-term dividend growth companies—the S&P 500® Dividend Aristocrats® Index, the S&P MidCap 400® Dividend Aristocrats® Index, the S&P® Technology Dividend Aristocrats® Index and others—and there are ETFs that follow many of them. So, in a market with decelerating earnings, high-quality dividend growth investments could be worth a closer look.

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

Emerging Markets: Enter the Dragon

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Sherifa Issifu

Associate, Index Investment Strategy

S&P Dow Jones Indices

The 2010s proved to be a disappointing decade for the S&P Emerging BMI, at least in relative terms. With a few weeks to go until the finish line, the index stands at a total return of 50% in U.S. dollars, compared with 160% for the S&P Developed BMI, as of Dec. 16, 2019. Although emerging markets did show signs of catching up in 2016 and 2017, as Exhibit 1 shows, overall the ratio between the two indices plots a steady underperformance over the past 10 years.

In the early 2000s, the BRICs (an acronym for Brazil, Russia, India, and China) were viewed as the emerging economies to watch over the coming decades. However, only China has consolidated its place as a true heavyweight, with the underperformance of other major developing markets acting as a drag on benchmark returns.

Our broadest measure of the Chinese equity market is the combination of the S&P Total China Domestic BMI (a broad universe of Chinese securities) plus the S&P China A Venture Enterprises Index of smaller Shenzhen-listed firms. Based on these indices, the total capitalization of the Chinese equity market has grown seven-fold since 2006, while the number of listed stocks quadrupled. Exhibit 2 plots the rise in number and capitalization of Chinese equities in the past 13 years.

China is a special case in several respects. While emerging markets are usually dominated by banks, commodity-related firms, and local consumer champions, China’s boom in equities has encompassed a wider and more balanced range of sectors, with the result that (as shown in Exhibit 3) the Chinese market has been less sectorally concentrated than is typical for so-called emerging or frontier markets.

Rather than price appreciation, the significant driver in the growth of China’s equity markets has been introductions of companies to list on the exchanges—particularly in the tech-heavy sectors. Evidencing this remarkable growth, as Exhibit 4 illustrates, today there are more Chinese Information Technology and Communication Services stocks than U.S. ones.

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

The Effects of Dispersion in Carbon Intensity Scores on Carbon-Efficient Portfolio Construction

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Akash Jain

Associate Director, Global Research & Design

S&P BSE Indices

In this blog, we investigate the dispersion of carbon intensity scores in detail and its effect on carbon-efficient portfolio construction via equal- and market-cap-weighted approaches. A company’s carbon efficiency is measured by its carbon intensity score (C.I. score), provided by Trucost, which is defined as the greenhouse gas (GHG) emissions from a company’s direct operations and first-tier suppliers, measured in metric tons of carbon dioxide equivalent (CO2e) per USD 1 million of revenue (CO2e/USD 1 million).[1] Some sectors, by nature of business, such as such as Utilities, Materials, Industrials, and Energy are carbon inefficient (higher C.I. scores) while other sectors, such as Financials, Information Technology, and Consumer Discretionary, are more carbon efficient.

C.I. scores can be widely spread even within the same sector. Relative dispersion[2] is a metric that allows us to measure this spread by normalizing across sectors and markets. The relative dispersion seen across the seven markets studied for the March 2018 basket (see Exhibit 1) shows that, in most Asian markets, Materials, Industrials, and Utilities sectors had the highest relative dispersion. For example, Exhibit 2 shows that in the Utilities sector in India, the C.I. scores ranged from 23 to 26,948 CO2e/USD 1 million. Within the Utilities sector, the stock with the lowest C.I. score belonged to a company involved with the generation and sale of renewable energy, whereas the company with the highest C.I. score was involved with the generation of power though coal and gas in addition to solar, wind, and hydroelectricity. This is of particular importance, as it enables a sizeable reduction of the weighted C.I. score even in sector-neutral portfolio construction approach (though to a more modest extent when compared with unconstrained approach, which does not limit active sector exposures). In India, the C.I. scores of the unconstrained and the sector-neutral carbon-efficient portfolios were 24 and 155, respectively. (see Exhibit 3 in our recent research paper).

The wide spread in C.I. score and market capitalization also affected the weighted average C.I. scores of the carbon-efficient and carbon-inefficient tertiles across markets. For example, in India, for the March 2018 basket, the equal-weighted C.I. score for the carbon-inefficient tertile basket was 4,106 CO2e/USD 1 million, whereas the market-cap-weighted version of the C.I. score was 2,689 CO2e/USD 1 million (see Exhibit 2), implying that the large-cap companies in India had lower C.I. scores in the carbon-inefficient basket. Despite dominance by large-cap companies in the market-cap-weighted portfolio, a reduction in the weighted average C.I. score for the carbon-efficient portfolios versus their respective carbon-inefficient portfolios remained significant across all markets. (see Appendix E in our recent research paper).

This unique spread of C.I. scores within each sector in each market could drive investors to prefer constructing a carbon-efficient portfolio either via sector-unconstrained or sector-neutral selection processes. Furthermore, investors could opt to weigh equally, although those concerned with investability could potentially turn to the market-capitalization-weighing approach to portfolio construction in order to improve C.I. scores, and therefore preserve asset size scalability.

[1]   Direct GHG emissions of an automobile manufacturer include the emissions from operation or production (e.g., welding, assembly of parts, painting, etc.), while the first-tier indirect emissions include emissions from supply chains and procurement, such as utilities, steel manufacturing, tires, spare parts, and business travel.

[2]   Relative dispersion = , where  represents the C.I. score of each stock.

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

Commodities – What to Watch for in 2020

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Fiona Boal

Head of Commodities and Real Assets

S&P Dow Jones Indices

In this blog post, we present five eclectic thoughts for commodity investors to ponder as we look forward to the New Year and the start of a new decade.

  1. S&P 500® versus S&P GSCI

Similar to the 1990s, the last decade saw equities radically outperform commodities. Prior to that, the 2000s were more volatile, with large variations in the ratio of the S&P GSCI to the S&P 500. Could the new decade echo in a period of mean reversion for this ratio? There are several conducive factors present in the global commodity markets. These factors include geopolitical and populist tensions rising globally, several commodities trading at their cost or break-even levels, and supply risks accelerating due to continued climate change.

It has been difficult to compete against the bull equity market. However, with mixed political, trade, and economic news, there is an argument to be made that the long-held benefits of diversification may come back to the fore and commodities may re-emerge as one of a number of diversification instruments available to investors.

  1. Commodity Equities or Commodities

On a more granular level, in 2019, there have been some noticeable differences in the performance of individual commodity futures and their complementary equity sectors. Exhibit 2 reflects the S&P GSCI subcomponents of energy, agriculture and livestock, and precious and industrial metals in the futures column. For the equities column, we chose the corresponding S&P DJI equity commodity sector indices.

Looking at Energy, petroleum prices climbed this year due to sanctions on Iran and Venezuela as well as continued OPEC+ production cut compliance. However, equities underperformed due to bearish market sentiment, with high debt levels present across the sector. Our colleagues at S&P Global Ratings expect Energy to lead in terms of defaults over the next five years. Energy has been the worst-performing sector this year, while the S&P 500 has made several new highs. Agriculture and livestock merger and acquisition (M&A) activity and broad equity market support gave these equities the impetus to move higher regardless of the move lower in physical agricultural and livestock prices. The futures were affected by the ongoing U.S.-China trade war, heavy levels of supply, and the African swine flu outbreak. In contrast, precious metals were notably higher and the large gold miners benefited handsomely from higher gold prices.

For market participants looking for commodity exposure, it is important to consider the different instruments available to them. As 2019 has shown, the factors affecting commodity equities can extend well beyond the supply and demand dynamics of the underlying commodity.

  1. Natural Gas – A Hard Lesson in Curve Structure

It looks likely that natural gas will end the year with the poorest performance of all the single‑commodity S&P GSCI constituents. By the middle of December 2019, the S&P GSCI Natural Gas was down an eye-watering 31% for the year. As has been the case for many years, chronic contango in the natural gas futures curve contributed significantly to the persistent underperformance of index returns compared with spot prices for natural gas. According to our colleagues at S&P Global Platts, 2020 will be the first year when gas demand growth, including sizable liquefied natural gas (LNG) feedgas demand growth, exceeds gas production growth in the U.S. It remains to be seen if this switch in dynamics is sufficient to flip the futures curve from contango to backwardation, but there is little doubt that the ongoing growth in LNG demand has the potential to change the dynamics of the broader natural gas market.

  1. Inflation Protection – Will Investors Ever Need It Again?

The current low-inflation environment may be unjustifiably penalizing commodities as a long-term inflation hedge. Inflation can be notoriously difficult to forecast, and market participants can experience an inflation shock before inflation expectations are adjusted upward. Inflation across the major global economies has been in a coma for many years, and negative bond yields would suggest that few investors have inflation at the top of their list of worries heading into the New Year. However, consider that a litany of headwinds—the trade war, Brexit, the slowdowns in Europe and China—if they accelerate, it could encourage levels of domestic fiscal stimulus that may stoke inflation expectations. It’s a long shot, but not out of the realm of possibility.

  1. IMO 2020

With the first major regulation hitting fuel markets since the removal of lead in gasoline in 1973, market participants have become concerned about potential volatility that may be on the horizon in petroleum markets. The new IMO 2020 rule requires container ships to switch from fuel made with 3.5% sulfur to 0.5% unless they are equipped with exhaust-cleaning scrubbers. Most shippers will comply by switching to very low sulfur fuel oil or marine gasoil. With demand picking up for sweet crude grades like WTI and European Brent, which produce higher levels of distillates, there has already been a divergence of prices between sweet crude grades and sour crudes from countries such as Canada, Mexico, and Venezuela.

Outside of the impact on the petroleum market, it will be fascinating to see what impact, if any, these new regulations have on global shipping markets beyond higher marine transport costs. With approximately 90% of the world’s trade carried by sea, any type of disruption could, in the worst case, be an unwelcome drag on global economic activity.

The author would like to thank Jim Wiederhold for his contribution to this blog.

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

Equity Markets React to the U.K. Election

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Tim Edwards

Managing Director, Index Investment Strategy

S&P Dow Jones Indices

At the General Election on Thursday, U.K. voters handed a resounding victory to Boris Johnson’s Conservative party.  The British electorate awarded the party with 365 out of 650 seats, the largest outright majority of any U.K. government since 2001, and the biggest victory for the Conservative party since Margaret Thatcher’s final victory in 1987.

Exhibit 1: Johnson wins largest Conservative Majority Since 1987

For once, the polls largely got it right.  A conservative majority had been predicted ever since Johnson’s elevation to Prime Minister on July 23rd, 2019; the market’s reaction on Friday continued along the line of established trends.   Exhibit 2 shows selected winners and losers from Friday’s trading, as well as the cumulative performance of the same indices since the mid-summer.

Exhibit 2: U.K. Equity Election Winners and Losers  

In signs that the market believes the U.K. economy may benefit in the near-term, smaller U.K. companies outperformed larger companies, and companies with more domestically-focused revenues outperformed those with a more international customer base.  Airlines, which had been hammered by the twin threats of a “no deal” Brexit and the Brits’ diminishing holiday purchasing power, soared.  Meanwhile the automobile industry, perhaps nervously anticipating the focus of U.S. / U.K. trade talks, added to the recent declines.

With the pound sterling moving 7% over the past five months, it is tempting to wonder if currency movements (and sensitivities to exchange rates) offer a universal explanation for the recent, relative performances of British equities.  Even in U.S. dollar terms, however, U.K. companies tilted towards domestic customers have made significant gains since June, rising by more than a quarter in total return.  Over the same period, internationally-focused U.K. firms finished flat.

Exhibit 3: Domestic U.K. Firms Have Risen 25% in U.S. Dollar Terms Since June

The U.K. economy, widely viewed as a difficult and stressful place to invest during the fragile governments of former Prime Ministers May and Cameron, may be becoming “investable” once more as the impasse in parliament unblocks.  However, there remains much to do before the U.K. can emerge from negotiations with its European partners.  While the current focus is the exit terms from the trading bloc, a negotiation on the terms of future trade must follow.

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