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Will April Pain Lead to May Gain for Commodities?

ETFs Add to African Access

Durability During Distress

Using Sector & Industry Indices to Uncover Opportunity

Pension Fund Industry in Mexico: Analyzing the S&P/BMV Mexico Target Risk Index Series across Different Economic Crises

Will April Pain Lead to May Gain for Commodities?

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Jim Wiederhold

Associate Director, Commodities and Real Assets

S&P Dow Jones Indices

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COVID-19 continued to wreak havoc across commodities markets in April. The S&P GSCI fell 9.67% in April and 47.92% YTD. Economic data continued to weaken into uncharted territory. Supply chains crucial to the flow of commodities from extraction to consumption experienced a sudden shut off and demand collapsed. Energy and agriculture underperformed, while metals offered some green shoots.

With the collapse of front-month oil prices on April 20, 2020, the full effect of the oil supply glut was revealed. Market historians can now add negative oil prices to the list of unprecedented market events of 2020. Demand disappearance, diminishing storage capacity, and physically settled May WTI crude oil contracts produced a perfect storm for energy-related commodities. Global energy demand could slump by 6% in 2020 due to the restrictions placed on transport and industrial activity in what would be the largest contraction in absolute terms on record, according to the International Energy Agency. Compounding the hit to price levels that the COVID-19 pandemic has had on demand, oil output from OPEC was the highest since March 2019. OPEC+ production cuts are expected to take effect from the start of May 2020. After falling 54.72% in March 2020, the S&P GSCI Crude Oil dropped another 40.69% in April 2020. Crude oil volatility spiked to all-time highs as the weakness was felt across all oil products.

The S&P GSCI Industrial Metals rose 0.96% in April, reversing some of the downside seen in March. Copper and nickel were both supported by China restarting production facilities that had been on lockdown, as well as supply chain disruptions.

With elevated levels of volatility across assets, the S&P GSCI Gold rose 6.03%, outshining all other commodities and demonstrating its safe-haven status during times of market uncertainty. According to the World Gold Council, investment demand for the yellow metal rose 80% in Q1 2020 compared to the same quarter last year, which offset a 39% fall in jewelry demand.

The S&P GSCI Grains fell 6.25%, with weakness seen across the board. The S&P GSCI Corn underperformed the most (-7.60%) due to its correlation to energy in the ethanol space. The dramatic increase in demand for grocery store food items could not offset the historic lack of demand for ethanol. Cocoa, cotton, and coffee reversed their divergent performance from the prior month. After a strong March, the S&P GSCI Coffee dropped 11.87% in April. After double-digit declines in March, the S&P GSCI Cotton and S&P GSCI Cocoa both advanced 11.56% and 7.12%, respectively.

The S&P GSCI Livestock dropped 5.15% in April. Millions of pounds of meat are expected to be missing from the U.S. supply chain as several major meat producers shut down plants and slaughterhouses. Meat shortages at grocery stores are expected in the near term, as farmers face the likely culling of herds because they will not have anywhere to sell their livestock to be processed. In April, it was estimated that nearly a third of U.S. pork processing capacity was offline.

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

ETFs Add to African Access

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Kevin Horan

Director, Fixed Income Indices

S&P Dow Jones Indices

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The exchanged-traded fund (ETF) structure has led to increased investment options within fixed income, and the African markets are a clear example of this. Over the past few years, several African ETFs have been introduced to the market, tracking indices provided by S&P Dow Jones Indices in South Africa, Nigeria, and Namibia, giving investors options to participate in this investment space. With transparent indices and tight-knit local ties, S&P Dow Jones Indices and ETF providers have opened asset classes that historically were only accessible to large and more sophisticated investors. Market segments such as high yield, emerging markets, and international markets, which were inaccessible just a few years ago, have become an investment opportunity for all market participants. In addition to accessibility, the yields of African sovereign bonds have tended to be higher than both investment-grade and high-yield corporate bonds in the U.S.

The ETF structure has been around since the early 1990s and has become a popular approach to investing for both equity and debt investments. ETFs are no longer considered a niche product and a growing number of organizations utilize this investment vehicle. The ETF structure has made it easier and cheaper to own and trade big groups of securities at once, on demand. Investors can diversify their exposure by buying entire baskets of securities without buying and selling the underlying individual securities. Because of these efficiencies and benefits, ETFs are being used by investors and traders around the globe.

The popularity of ETFs can be understood by the benefits provided across asset classes. ETFs provide transparency and efficiency as an exchange-traded product that is priced continuously intraday. This makes it easy for an investor to discover the value, gain diversification, and trade in a tactical way. The ETF structure also provides low transaction fees, leading to low management costs, and it can also present tax efficiencies. Recent volatile times have provided a test to ETFs not seen since the global financial crisis of 2008. Nevertheless, ETFs have held their own and have been observed to be an efficient price indicator in challenging markets.

Despite the current economic challenges related to COVID-19, opportunities exist for investment in Africa. Over the past five years, Africa has gone from being a challenge in terms of its financial potential to an enticing prospect for emerging market investors.

A World Economic Forum study mentioned that by 2030, African household consumption is expected to reach USD 2.5 trillion. The study goes on to state: “Nearly half of that $2.5 trillion will be spent in three countries: Nigeria (20%), Egypt (17%), and South Africa (11%). But there will also be lucrative opportunities in Algeria, Angola, Ethiopia, Ghana, Kenya, Morocco, Sudan, and Tunisia. Any one of these countries would be a good bet for companies seeking to enter new markets.”

The African market continues to strengthen its position in the world by developing its economy, manufacturing capabilities, infrastructure, and technology. Additional investments will be required to keep African countries continually growing and achieving future expectations, but the efficiencies of an ETF can assist in making such an investment possible.

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

Durability During Distress

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Anu Ganti

Senior Director, Index Investment Strategy

S&P Dow Jones Indices

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Income-seeking investors have always had to compromise between the level of dividend payments and the safety of dividend payments.   The importance of this tradeoff has recently gone viral, as governmental actions in response to COVID-19 have suppressed global economic activity, causing many companies to suspend or reduce their dividend payments.

Launched in 2005, the S&P High Yield Dividend Aristocrats Index comprises S&P Composite 1500® members that have increased their dividends annually for at least 20 years.   The market has rewarded consistent dividend payers: Exhibit 1 shows that the High Yield Aristocrats have outperformed the S&P 1500 over the long term.

Source: S&P Dow Jones Indices LLC. Data from December 1999 to March 2020. Index performance based on total return in USD. Past performance is no guarantee of future results. Chart is provided for illustrative purposes.

As of the beginning of 2020, the aggregate capitalization of the High Yield Aristocrats amounted to 18% of the S&P 1500 Composite.  For comparison’s sake, we identified a list of “High Payers”  — the 18% of the 1500 Composite with the highest dividend yields. Exhibit 2 compares the median values of these two portfolios on a number of fundamental metrics that measure the strength of companies making dividend payouts.

The High Yield Dividend Aristocrats appear stronger across the board. For example:

  • Earnings were double last year’s dividend payouts for the Aristocrats, vs. only 1.2x dividends for the high payers. Cash on hand was also a higher multiple of last year’s dividends.
  • The Aristocrats used buybacks to return cash to shareholders to a greater degree than the high payers did. Since buybacks are likely to be reduced before dividends are cut, their usage provides a larger cushion for the Aristocrats.
  • The Aristocrats are larger (median capitalization $12 billion) and more profitable (median ROE 15.5%) than their higher-paying counterparts.
Source: S&P Dow Jones Indices LLC, FactSet and S&P Capital IQ. Market cap data as of April 2020, remaining data as of 2019 calendar year-end. Metrics listed include the median levels. Chart is provided for illustrative purposes.

There obviously can be no guarantees in a pandemic; if a company’s business is affected badly enough, dividend reductions are always possible regardless of how strong the income statement and balance sheet appeared a year ago. What this analysis tells us, though, is that the dividends of companies with consistent dividend growth are better protected from headwinds.

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

Using Sector & Industry Indices to Uncover Opportunity

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Could higher dispersion in sectors and industries translate to outperformance? S&P DJI’s Anu Ganti explores how index data can be used to inform tactical sector rotation strategies in periods of high volatility.

Get the latest sector dashboard: https://spdji.com/indexology/sectors/us-sector-dashboard.

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

Pension Fund Industry in Mexico: Analyzing the S&P/BMV Mexico Target Risk Index Series across Different Economic Crises

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Jaime Merino

Director, Asset Owners Channel

S&P Dow Jones Indices

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It is unnecessary to give an update on today’s economic situation since most already have a wealth of information over the repercussions of the COVID-19 pandemic. I will instead focus on another major concern: how have pension funds performed, and furthermore, are there similarities in how they have performed during other crises?

After the S&P/BMV IPC dropped 16.38% from its highest monthly return posted in the past 10 years, the S&P/BMV Sovereign MBONOS Bond Index fell 0.72% and the S&P/BMV Sovereign UDIBONOS Bond Index followed with a loss of 3.10%. In this environment, we would expect that pension funds would have their worst month, or even their worst quarter.

Using data provided by Consar (available since December 2015),[1] we can see that Afore assets dropped 3.35%, the second-worst month in the past five years, with October 2018 taking the lead with a loss of 3.89%, as shown in Exhibit 1.

The pension fund system recently changed investment philosophy, moving from a target risk to a target date structure. Since the changes are so recent, we feel it is still appropriate to use the S&P/BMV Mexico Target Risk Index Series as a proxy to analyze performance before and during the COVID-19 crisis since instead of 4 strategies, now 10 different strategies are available with the same rules.

Exhibit 2 illustrates that despite performance losses, the indices had a positive slope and low volatility.

In Exhibit 3, we can see that March 2020 is the fourth-worst month since December 2008 for the S&P/BMV Mexico Target Risk Aggressive Index and S&P/BMV Mexico Target Risk Growth Index, while the S&P/BMV Mexico Target Risk Conservative Index held up well and did not rank among the lowest five months historically, driven by high exposure to fixed income indices and their performance relative to local and foreign equity. February 2009 was the worst-performing month for all the indices, which, interestingly was followed by the top monthly performance for all indices in March 2009, at 6.86%, 5.39%, 4.14%, and 3.53% for the S&P/BMV Mexico Target Risk Aggressive Index, S&P/BMV Mexico Target Risk Growth Index, S&P/BMV Mexico Target Risk Moderate Index, and S&P/BMV Mexico Target Risk Conservative Index, respectively.

Looking at quarterly results, we can see that the first quarter of 2020 was the third-worst quarter for all indices except the S&P/BMV Mexico Target Risk Conservative Index, while Q2 2013 and Q4 2018 suffered greater losses.

Yearly results show that only the S&P/BMV Mexico Target Risk Aggressive Index recorded a loss in 2018 (we consider the 0.01% loss of the S&P/BMV Mexico Target Risk Growth Index flat), and in 2013 all other indices finished in the black.

Without minimizing the current COVID-19 crisis, there is a glimmer of hope. History shows that crisis months with heavy losses can be followed by positive months and, when using a disciplined approach of diversification and risk management, even result in a year ending on a positive note.

While the results of the S&P/BMV Mexico Target Risk Index Series may differ from those of any particular Afore, the indices were created taking into account the investment regime of Consar (read more here) and provide a benchmark we can use with our own Afore. In conclusion, do not be afraid of a month with losses and instead use a disciplined investment approach in line with your risk tolerance.

[1] http://www.consar.gob.mx/gobmx/Aplicativo/WebDashboard/WebDashboard.htm

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