Investment Themes

Sign up to receive Indexology® Blog email updates

In This List

S&P and Dow Jones Islamic Indices Continue Outperformance in Q1 2020

Performance of Latin American Markets in Q1 2020

Pandemic Accelerates Long-Term Shifts in Australian Equity Market: Health Care Reigns Supreme

Fantasies from a Dividend Perspective

Q1 2020 Performance Review for the S&P Risk Parity Indices

S&P and Dow Jones Islamic Indices Continue Outperformance in Q1 2020

Contributor Image
John Welling

Director, Equity Indices

S&P Dow Jones Indices

two

Amid Losses, Shariah-Compliant Benchmarks Beat Conventional Counterparts by Substantial Margins

Global equities fell 22.3% during Q1 2020, as measured by the S&P Global BMI, with COVID-19 taking center stage and cases growing worldwide. The S&P Global BMI Shariah—which fell 17.2%—markedly outperformed its conventional benchmark by more than 500 bps, marking its greatest quarterly outperformance since inception. The trend played out across all major regions as the S&P 500® Shariah outperformed its conventional counterpart by 2.7%, while the Dow Jones Islamic Market (DJIM) Europe and DJIM Emerging Markets each outperformed their conventional benchmarks by more than 8.0%.

Sector Performance Acts as a Key Driver

Amid the tough backdrop, broad-based Islamic indices outperformed their conventional counterparts by a substantial margin, as Information Technology and Health Care—which tend to be overweight in Islamic indices—outperformed among sectors, while Financials—which is underrepresented in Islamic indices—heavily underperformed the broader market.

MENA Equity Returns Varied  

Following the MENA equities underperformance in 2019, the S&P Pan Arab Composite mimicked steep emerging market declines during Q1 2020, with a loss of 23.4%. The S&P Oman led the way in the region, holding losses at 8.7%, followed by the S&P Qatar, which declined 18.0%. The S&P UAE suffered the steepest losses, falling 30.3%, followed by the S&P Egypt BMI which declined 29.4%.

Shariah-Compliant Multi-Asset Indices Outperform

The DJIM Target Risk Indices—which combine Shariah-compliant global core equity, sukuk, and cash components—outperformed the S&P Global BMI Shariah and DJIM World Index in Q1 2020 across all allocations as diversification away from equities stabilized returns. The comparably more risk averse DJIM Target Risk Conservative Index was the best performer, due to its 80% combined allocation to sukuk and cash during the declining equity environment, ultimately contracting 5.3% during the quarter. Meanwhile, the DJIM Target Risk Aggressive Index suffered the greatest losses—down 16.6%—due to its 100% allocation to a mix of Shariah-compliant global equities, in alignment with the broader S&P Global BMI Shariah and DJIM World Index.

For more information on how Shariah-compliant benchmarks performed in Q1 2020, read our latest Shariah Scorecard.

A version of this article was first published in Islamic Finance news Volume 17 Issue 15 dated the 15th April 2020.

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

Performance of Latin American Markets in Q1 2020

Contributor Image
Silvia Kitchener

Director, Global Equity Indices, Latin America

S&P Dow Jones Indices

two

Recently, I read a comment that suggested we skip 2020 altogether. This new decade has not really started well—if only we could jump straight to 2021. Amid the overwhelming impact of the COVID-19 pandemic on public health and on the economy, perhaps what resonates best is that “this too will pass.”

U.S. equities, which serve as a guidepost for the global economy, surpassed prior all-time highs in volatility. VIX®, also known as the “fear gauge,” has not reached similar highs since the global financial crisis (GFC) in 2008. The higher the uncertainty, the higher the option prices that are used to calculate VIX. The precipitous drop in oil prices following a price war between Russia and Saudi Arabia threatened a collapse of the Energy sector, adding to the uncertainty in the U.S. and globally. Unemployment in the U.S. continued to rise—in the last two weeks of the quarter, nearly 10 million Americans applied for unemployment benefits following the shutdown of thousands of businesses. It’s expected that this number is only a sign of further job losses to come and that unemployment filings will double in the coming weeks. Many impacted businesses are in the travel, entertainment, restaurant, retail, and real estate industries.

What about Latin America? Like a tsunami that started in Asia and then ravaged Europe, COVID-19 and its effects are now flooding the Americas. Despite the closing of borders and quarantines, the pandemic continues to sweep the continent. Governments have started to institute policies to minimize the public health and the economic impact. Similar to the U.S., which has approved a USD 2 trillion stimulus package to help mitigate the effects of the pandemic, Brazil has approved around USD 30 billion. Peru is also reviewing a similar package. In Chile, the president approved a USD 12 billion package. In Argentina, the World Bank will lend USD 300 million in emergency funds. Colombia and Mexico have not yet announced any major economic measures at this time. The question many ask is, will all this be enough? In the midst of uncertainty, the answer depends on how quickly the pandemic recedes and life goes back to normal.

According to S&P Global’s rating analysts, it is expected that the outbreak will push Latin America into a recession in 2020, recording its weakest growth since the GFC. They have also forecast that GDP will contract by 1.3% in 2020, before bouncing back to a growth rate of 2.7% in 2021. Finally, the length of the recession—although potentially worse in some countries—may be much shorter: only two quarters are projected versus six quarters during the GFC.[i]

Latin American markets underperformed global markets during the first quarter. All gains from the previous years were completely wiped out. The S&P Latin America 40 posted the worst quarter on record, ending at -46% in USD terms. In comparison, the S&P 500®, which also had the worst quarter since 2008, lost 20%.

No economic sector was spared in the rapid downturn, as companies in important industries like energy, mining, and financials were hit hard. The average stock price drop for members of the S&P Latin America 40 was around -45% for the quarter. The Energy sector of the S&P Latin America BMI performed the worst among the 11 GICS sectors (-61%). Health Care had a difficult quarter (-45%), but thanks to its strong past performance, it lost a lot less for the mid-term periods.

Looking at individual markets in local currency terms, Argentina’s S&P MERVAL Index lost 41.5% for the quarter. Brazil and Colombia followed, returning -36% and -32%, respectively, as measured by the S&P Brazil BMI and the S&P Colombia Select Index.

In a sea of red for the quarter, in Mexico some indices were able to stay in the black. The S&P/BMV IPC Inverse Daily Index, which seeks to track the inverse performance (reset daily) of the S&P/BMV IPC, gained 23%. The following three indices also did well: the S&P/BMV MXN-USD Currency Index (26%), the S&P/BMV China SX20 Index (9.4%), and the S&P/BMV Ingenius Index (9.4%). The latter two indices are designed to measure international stocks trading on the Mexican Stock Exchange, and their strong performance is largely driven by the depreciation of nearly 20% of the Mexican peso relative to the U.S. dollar in Q1.

The first quarter is done, and the second quarter is looking gloomy. Comprehensive relief efforts are underway to help citizens and support our economies, and we can only hope for the best while we continue to tread carefully.

For more information on how Latin American benchmarks performed in Q1 2020, read our latest Latin America Scorecard.

[i] Elijah Oliveros-Rosen, For Latin America, The Path To Economic Recovery From COVID-19 Remains Uncertain, March 31, 2020.

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

Pandemic Accelerates Long-Term Shifts in Australian Equity Market: Health Care Reigns Supreme

Contributor Image
Michael Orzano

Senior Director, Global Equity Indices

S&P Dow Jones Indices

two

While the COVID-19 pandemic wreaked havoc on global financial markets, it has affected Australian equity sectors quite unevenly. Energy, Financials, and Real Estate have experienced the heaviest losses, while Health Care has outperformed by a wide margin, sustaining a 10% YTD gain through April 9, 2020.

In our recent paper marking the 20th Anniversary of the S&P/ASX Index Series, we discussed how changes to the composition of the S&P/ASX 200 over the past two decades provide a window into the evolution of the Australian stock market. One key observation made was the outsized growth of the Health Care sector—which increased from a 1% weight in the S&P/ASX 200 in 2000 to just over 10% as of the end of 2019, becoming the third-largest sector in the index behind Financials and Materials.

Fast forward to today, just a few months later, Health Care has increased to nearly 15% of the S&P/ASX 200, approaching the size of the Materials sector. One of its constituents, CSL—the Australian biotech giant—has become the largest Australian company by market value for the first time.

Exhibit 2 illustrates the increasing importance of the Health Care sector in the S&P/ASX 200 over the past two decades, a trend that gained notable momentum over the past 10 years. In fact, since March 2011, the combined weight of Financials and Materials—Australia’s largest sectors—decreased from 59.4% to 45.3%, while Health Care jumped from 3.2% to 14.2%.

At the launch of the S&P/ASX 200 in 2000, the Health Care sector’s total market cap was just AUD 7 billion. As of April 9, 2020, it surpassed AUD 210 billion, representing a compound annual growth rate of about 18.5% over 20 years.

In a nod to the sector’s growing clout, CSL unseated Commonwealth Bank as the largest Australian company by market value in March, thus becoming the top holding in the S&P/ASX 200. Five years ago, CSL was the eighth-largest company, and it first joined the top 10 in 2012.

Because of its size (CSL represents about 70% of the S&P/ASX 200 Health Care sector by market cap) and impressive returns, the overall growth of the sector can largely be attributed to its success. However, other prominent companies in the sector such as Cochlear, Sonic Health Care, and ResMed have also experienced strong long-term total returns. Likewise, sector growth has been largely organic. Each of the top five companies currently in the S&P/ASX 200 Health Care were listed on the ASX in 2000, and the top three (CSL, Cochlear, and Sonic Health Care) were S&P/ASX 200 constituents at launch.

Exhibit 5 illustrates the significant outperformance generated by the S&P/ASX 200 Health Care relative to the S&P/ASX 200 and the other largest equity sectors over the past 20 years. This trend has accelerated since 2012.

While Health Care has come to the forefront during this devastating pandemic, the sector’s recent rise is an extension of a long-term trend that has been unfolding in the Australian equity market for many years.

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

Fantasies from a Dividend Perspective

Contributor Image
Howard Silverblatt

Senior Index Analyst, Product Management

S&P Dow Jones Indices

two

Q1 2020 ended with record dividend payments for S&P 500® issues, as shareholders reaped the benefits of a 10-year bull market. March 2020 (and the first six trading days of April 2020), however, gave a glimpse of what Q2 2020 may look like, as dividend cuts and suspensions started to be announced, with suspensions more prevalent. For 2020, liquidity and cost control are now the top priorities, with dividends lower and buybacks an endangered species.

The Good: Q1 2020 dividends set a new record, paying USD 127.0 billion, up from USD 117.0 billion for Q1 2019.

The Bad: March 2020 announcements turned negative, as 13 issues announced cuts, with 10 of them being suspensions, making for a total forward impact of USD 13.9 billion, and more cuts are expected. For U.S. common issues, the net-indicated dividend change was USD -5.5 billion, with the last negative in Q2 2009 (USD -4.9 billion) and the previous record low in Q2 2009 (USD -43.8 billion).

The Ugly: For Q2 2020 to date (the first six trading days), there were 57 actions (none of them S&P 500 issues), with 7 positive and 50 negative, and 40 of the 50 negatives being suspensions, amounting to net change of USD -4.8 billion. As for January’s predicted 2020 double-digit dividend gain for the year, just put a “-” in front of it.

The Full Reality Is Starting: Looking at the announcement dates (typically after the board of directors meetings), the next three weeks will be telling, with the first key test being when the big banks start off the earnings season. Last month, eight banks acted in unison to suspend their buybacks (to date, 27% of the S&P 500 has been cancelled, with 72% of the Financials sector).

The full impact of these cuts will start to be felt soon by investors, as fewer dividend checks are sent out, with many of those going out smaller.

At this point, the depth of the cuts are dependent on the COVID-19 economic impact, and given we don’t know what that will be, companies may be forced to take prudent measures.

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

Q1 2020 Performance Review for the S&P Risk Parity Indices

Contributor Image
Rupert Watts

Senior Director, Strategy Indices

S&P Dow Jones Indices

two

It comes as no surprise that the COVID-19 pandemic had a profound effect on global markets in the first quarter of 2020. The S&P 500® suffered steep declines, and U.S. Treasury yields fell (prices rose) as investors favored a flight to quality. In commodities, the S&P GSCI ended March down an extraordinary 29.4%, the largest monthly drop in performance in its almost 29-year history.

Similarly, the first quarter proved a challenging one for the S&P Risk Parity Indices, with all of the volatility targets posting double-digit losses (see Exhibit 1). This was to be expected given the sudden and dramatic decline in the aforementioned asset classes.

Since their launch in 2018, the S&P Risk Parity Indices have been adopted by several asset owners and asset managers as a benchmark for active risk parity funds. As Exhibit 2 shows, the performance of the S&P Risk Parity Index – 10% Volatility Target was very much in line with the manager composite for the first quarter.

As we continue to analyze the S&P Risk Parity Index – 10% Volatility Target, let’s examine the asset class performance attribution (using excess returns). The S&P Risk Parity Indices comprise three asset class sub-components: equities, fixed income, and commodities.

As Exhibit 3 shows, negative performance for the first quarter was driven by commodities and equities, down 11.7% and 8.9%, respectively. Fixed income finished the quarter up 7.2%, which, despite its comparative weight advantage, was not enough to offset losses in the other two asset classes.

When it comes to weighting assets, risk parity attempts to maximize the diversification benefits by allocating capital such that each asset class contributes an equal amount of volatility to the total volatility of the portfolio. Thus, less-volatile asset classes, like fixed income, are typically assigned a higher weight. Additionally, the index is typically leveraged to meet the stated volatility target to achieve a stable risk profile.

As Exhibit 4 shows, the leverage decreased only slightly in March, but it is anticipated that April will be more pronounced as the impact of March is fully absorbed. That being said, dramatic changes are not expected given the fact that the look-back window on the volatility calculation is fairly long (15 years).

While markets started April on the front foot, we are not out of the woods yet when it comes to uncertainty over the coronavirus. Although the first quarter was a challenging one for the S&P Risk Parity Indices, they still offer the potential to help improve risk-adjusted returns over the long term. By placing each asset class on an equal volatility footing, the diversification benefits have a better chance of shining through compared to traditional fixed allocation approaches.

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