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Style Rotation through the Revenue Exposure Lens

A Reversal, or Two

Are Asian Companies More or Less Carbon Efficient Than Their Global Peers?

How and Why Are Market Participants Accessing REITs in the Current Climate?

Reflecting on the Inflection Points of 2020

Style Rotation through the Revenue Exposure Lens

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Hamish Preston

Director, U.S. Equity Indices

S&P Dow Jones Indices

One of the major trends in the last few years has been the outperformance of large, growth-oriented stocks and, at first glance, 2020 represented a continuation of this trend. For example, the S&P 500® Growth (33.5%) outperformed the S&P 500 Value (1.4%) by 32.1% last year, the largest difference in calendar year total returns between the two indices, ever.

However, focusing on the overall picture for 2020 ignores a recent reversal in fortunes—Value outperformed Growth by 3.8% between the end of September and latest annual S&P U.S. Style Indices reconstitution (Dec. 18, 2020), contributing to Value’s second-largest quarterly outperformance since 2009 (Value beat Growth by 6.9% in Q4 2016).

Much of the outperformance in Q4 2020 can be attributed to the beginning of the COVID-19 vaccine rollout, which fueled expectations of an economic recovery and lifted many value-oriented stocks that were particularly impacted by the COVID-19 correction. Overall, S&P 500 Value constituents posted higher returns than their Growth counterparts in 7 of the 11 GICS® sectors leading up to the December 2020 style reconstitution.

More recently, Value has outperformed by around 2% since the results from the latest reconstitution went into effect (prior to the open on Dec. 21, 2020). Value-oriented Financials provided tailwinds, lifted by increased investor speculation that interest rates will rise in 2021 in response to higher U.S. inflation expectations.

While it remains to be seen which news stories will dominate headlines this year, georevenue exposure may offer insights into the relative fortunes of Value and Growth. For example, Exhibit 3 shows that value-oriented companies are typically more domestically focused than their growth counterparts: the sales-weighted average U.S. revenue exposure is greater for many sectors in the Value index compared to the Growth index. This suggests that news that causes investors to change their U.S. economic outlook and/or expectations for domestic consumers’ spending—such as the vaccine rollout late last year—may have an outsized impact on Value’s returns. Similarly, Growth’s fortunes may be more sensitive to global narratives, especially as they relate to some of the largest market constituents.

As a result, the recent reversal in Value’s fortunes has led some investors and commentators to suggest that we may be witnessing a long-anticipated rotation away from Growth and into Value. Although we shall see whether there is growth in value or value in growth, differences in georevenue exposure may be a useful way to understand movements across style indices.

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

A Reversal, or Two

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Tim Edwards

Managing Director, Index Investment Strategy

S&P Dow Jones Indices

For many equity investors, the stand-out theme of last year was the reversal in the market’s initial response to, and recovery from, the COVID-19 pandemic: the dramatic price declines in March, the wild swings around the bottom as VIX® marked its highest closing level ever, and the just-as-dramatic recovery to new all-time highs by late summer. That reversal set the big picture: after its recovery and barring a few small bumps along the road, the S&P 500® continued to break records for the remainder of the year, celebrating with a final closing record high on Dec. 31, 2020.

The full-year performance of the S&P 500 sectors and factors highlighted in Exhibit 1 seem to conform to a single narrative: large, tech-related, growth companies benefited from the changing circumstances of the pandemic, while smaller companies, and energy and value companies in particular, continued their multi-year trend for underperformance.

Yet, another major reversal may also have occurred.  Less obvious but with the potential to be just as significant, this was more keenly felt in relative (as opposed to absolute) returns. It was visible in cracks in the once seemingly unstoppable momentum of large, tech-related growth companies, the poster companies of which are now the S&P 500’s largest weights. Apple, Microsoft, Alphabet, Facebook, Amazon and (now) Tesla stand at the nexus of several multi-year trends: larger stocks outperforming smaller, growth stocks outperforming value, and less flashy sectors, like energy and materials, underperforming the average.

Exhibit 2 suggests that there have been not one but two reversals this year in the S&P 500’s factor and sector winds: one in the late spring that ended in the late summer and accompanied the market’s recovery from the depths, and a further, visually more significant reversal in the trends that occurred in the final quarter. Intriguingly, this continued into the new year; the data included in the chart run up to the most recent close at time of writing, Jan. 6, 2021.

A return to winning form for value and small-cap stocks has long been anticipated; these strategies, thanks in part to their canonical status as original Fama-French factors and long performance record, have attracted a broad range of followers. The decline of the Energy sector—once more than 16% of the S&P 500 by weight, and now only 2% (see Exhibit 3)—has been a similarly long-term and connected source of disappointment for investors.

As we pointed out in our recently published S&P 500 Factor Dashboard, the challenges to continued outperformance from large-cap growth, driven by Big Tech or otherwise, are different to what they were a year ago. To outperform next year, the capitalization-weighted S&P 500 Growth may have to rely on an unusually narrow range of companies: the index’s largest five weights composed 40% of the total index by the end of last year, the highest ever annual reading. If those large names at the top falter, value’s time to shine may be finally upon us.

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

Are Asian Companies More or Less Carbon Efficient Than Their Global Peers?

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Liyu Zeng

Director, Global Research & Design

S&P Dow Jones Indices

With the launch of the S&P Global Carbon Efficient Index Series in 2018, S&P DJI introduced the S&P Carbon Global Standard, a proprietary carbon classification system that assigns carbon deciles to companies within their respective industry groups. The framework uses carbon-to-revenue footprint (carbon intensity) for companies in the S&P Global LargeMidCap to determine carbon decile thresholds for each industry group and defines companies’ carbon deciles according to these thresholds.

To compare the carbon efficiency of Asian companies with their global peers, we evaluated the carbon decile ranks of companies in the S&P Global BMI Series1 for Australia, Hong Kong, Japan, South Korea, China, India, and Taiwan. We compared the distribution of companies across high- (1st-3rd), mid- (4th-7th), and low-carbon deciles (8th-10th) within each industry group for each market.

A higher proportion of companies in high- (low-) carbon deciles implies companies in that industry group tended to be more (less) carbon efficient than their global industry group peers (in green and red, respectively).

Australia had the highest portion of high-carbon decile ranked companies (34.5%), while Hong Kong had the highest percentage of lower-carbon decile ranked companies (38.6%).  Carbon decile ranks for Materials companies were the most favorable across developed Asian markets, with a higher concentration of companies in high- versus low-carbon deciles.  In contrast, more companies with a low-carbon rank were seen in Commercial & Professional Services and Food, Beverage & Tobacco.

In Australia, a majority of Consumer Durables & Apparel, Telecommunication Services, Consumer Services, Technology Hardware & Equipment, Materials, and Capital Goods companies were in high-carbon deciles, while a larger portion of low-carbon decile ranked companies were seen in Retailing and Insurance.

In contrast, most Commercial & Professional Services, Food, Beverage & Tobacco, Consumer Durables & Apparel, Media & Entertainment, Automobiles & Components, and Diversified Financials companies received low-carbon decile ranks in Hong Kong, and a high concentration in high-carbon deciles was only seen in Insurance and Utilities.

Over 50% of Japanese Energy, Banks, and Materials companies had favorable decile ranks, while the highest concentration of low-carbon decile ranked companies was found in Insurance, Media & Entertainment, and Retailing.

In South Korea, 64.3% of companies in Consumer Services received high decile ranks, while over 50% of companies in Transportation, Banks, and Health Care Equipment & Services ranked in low deciles compared with their industry group peers.

Among emerging Asian markets, the percentage of companies in low-carbon deciles tended to be higher than those in high-carbon deciles, and Taiwan had the highest number of industry groups with a high concentration in low-carbon decile companies. Emerging Asian market companies tended to be less carbon efficient than those in developed Asian markets. Carbon decile ranks for companies in Consumer Durables & Apparel, Retailing, and Food, Beverage & Tobacco tended to be the least carbon efficient among emerging Asian markets.

Over 50% of Chinese Banks and Consumer Services companies were ranked in high-carbon deciles, while over 50% of companies in Commercial & Professional Services, Household & Personal Products, and Energy received low decile ranks.

A high concentration of high-carbon deciles was seen in Indian Commercial & Professional Services, Utilities, and Telecommunication Services companies, while the highest portion of companies in Consumer Durables & Apparel, Retailing and Food, Beverage & Tobacco received low-carbon decile ranks.

In Taiwan, Media & Entertainment was the only industry group with over 50% of companies ranked in high-carbon deciles. A majority of companies in Energy,2 Transportation, Consumer Durables & Apparel, Health Care Equipment & Services, Commercial & Professional Services, Retailing and Food, Beverage & Tobacco received low-carbon decile ranks.

The S&P Global Carbon Standard not only provides a classification system to evaluate companies’ carbon efficiencies, it also serves as a critical framework for reweighting companies in the S&P Global Carbon Efficient Indices, which assign index weights toward companies with low-carbon intensities and penalizes those with high-carbon intensities to achieve an index portfolio with reduced carbon intensities.

1 The S&P Global BMI Series is designed to measure the performance of the broad equity market of the respective country or region. For more details, please see https://www.spglobal.com/spdji/en/indices/equity/sp-global-bmi/#overview.

2 There was only one company in the Energy sector of the S&P Taiwan BMI as of May 15, 2020.

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

How and Why Are Market Participants Accessing REITs in the Current Climate?

Can REITs help unlock potential income opportunities in today’s markets? S&P DJI’s Priscilla Luk and Samsung Asset Management’s Alex Yang take a closer look at practical applications for REITs in the current environment.

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

Reflecting on the Inflection Points of 2020

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Jim Wiederhold

Associate Director, Commodities and Real Assets

S&P Dow Jones Indices

Last year might end up being known as the year of countless inflection points. Narratives that were playing out over months and years were accelerated or reversed with volatility not seen since World War II. Among commodities, there were new all-time highs hit in gold and new all-time lows that reached into negative territory for crude oil. Exhibit 1 shows that while the S&P GSCI dropped 24% for the year, three sectors finished positive and a monstrous 69.24% separated the best-performing S&P GSCI Precious Metals from the worst performing S&P GSCI Energy.

One of the most monumental narratives of 2020 involved the April dip into negative territory for WTI Crude Oil front month futures. Fiona Boal explained what happened during this extreme time in commodities history and how Crude Oil Can Get Carried Away by Contango. Inflows into ETFs tracking crude oil exploded, with many market participants trying to buy the dip. Economies have slowly reopened since, but energy usage is still below 2019 levels. The one bright spot within energy was the S&P GSCI Unleaded Gasoline, which rose 12.82% in December. Holiday travel demand picked up in the Western Hemisphere while demand overall for autos remained strong, as they are seen as one of the safest ways to travel during a pandemic. The S&P GSCI Natural Gas dropped 12.56% in December as warm winter forecasts reduced the need to stock up for building heating needs.

The S&P GSCI Agriculture and S&P GSCI Livestock took two very different paths in 2020. The former rose 14.94% while the latter fell 22.10%. As these have been somewhat correlated historically due to the use of grains as feed for livestock and geographically being grown in some of the same areas, 2020 was an inflection point. Except for coffee, every S&P GSCI Agriculture constituent rose, most by double digits. The most fundamental reason for bullishness was the surprise shortfall in grain stocks, which pushed some grains to multi-year highs. Following years of oversupply, the increasingly unpredictable weather patterns and the return of purchases from large consumer nations such as China represented an inflection point for agricultural commodities in 2020.  The 2020 Atlantic hurricane season had the most hurricanes on record, with 30 named storms, over two and a half times more than the average. While many meat producers were hit hard with COVID-19 outbreaks in their plants reducing supply, the hog herd in China returned with gusto after 2019’s African Swine Fever outbreak. The supply in China more than offset any reduction in the U.S. On the demand side, U.S. restaurant dining picked up during Q3 2020, but fell again to June levels by the end of Q4.

Green technologies were building momentum for years, but 2020 might be the inflection point where they truly took off. Besides rare earth metals, the building blocks for many of these technologies come from the S&P GSCI Industrial Metals and S&P GSCI Precious Metals. All five constituents of the S&P GSCI Industrial Metals are used in low-carbon technologies, with aluminum, nickel, and copper used the most. Within the precious metals space, silver is used extensively in solar photovoltaics, LEDs, and electric vehicles. Exhibit 2 shows metal use in select low-carbon technologies.

Any of the S&P GSCI Single Commodities Indices could be used to implement tactical views on the direction of a single commodity. S&P Dow Jones Indices calculates hundreds of indices based on commodities around the world in real time. Check out our website for more information.

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