Indexology^® Blog

Concerns of a rising U.S. dollar may pose a hindrance to initiating commodity exposure from outside the U.S. Most commodities around the world are priced in U.S. dollars, so when the value of the U.S. dollar rises, the value of commodities typically falls. The launch of new non-U.S.-dollar-denominated S&P GSCI Single Commodities Indices could help commodity exposure seekers gain access while alleviating the external currency risk. Exhibit 1 shows the newly expanded universe of the S&P GSCI Single Commodities Index offerings. These indices are designed to track commodities from exchanges outside of the U.S. and are priced in currencies of the home countries.

These indices not only offer a non-U.S. dollar exposure to natural resources, but also assist with the financialization of alternative commodities markets, some of which are completely new, and others that are alternatives to more-established futures markets. Exhibit 2 illustrates the 2021 YTD performance of many of these commodities.

There are good reasons for the recent excitement around these commodities. Several of these commodities are used in renewable diesel applications. Fiona Boal, Head of Commodities and Real Assets at S&P DJI, wrote a two–part blog series discussing the expanding interest in these non-fossil-fuel inputs to renewable energy. Several other of these indices expand the geographic footprint and offer alternatives to the more well-known commodities like gold, corn, and natural gas that are traded on U.S. exchanges. The Tokyo-, London-, Saskatchewan-, Paris-, and Kuala Lumpur-based futures offer commodity participants exposure outside of traditional U.S.-based markets.

Tactically allocating to individual commodities when conditions are ripe has historically only been within the realm of a small group of domain expert traders. But as the broad cohort of market participants becomes more sophisticated and access to alternative asset classes improves, it is possible that the tactical allocation to commodities will expand. Commodities can be used as building blocks to express thematic macro plays and can easily be traded due to highly liquid and robust markets. Commodities also benefit from being equally tradeable, in both long and short positions. Single-commodity indices tracking front-month futures contacts provide the opportunity to access this market on the long or short side.

Check out our new website celebrating 30 years of the S&P GSCI and our newly published thought leadership paper looking at what the next 30 years might have in store for commodities.

Global equities continued to rise during Q1 2021, gaining 2.5%, as measured by the S&P Global BMI. Shariah-compliant benchmarks, including the S&P Global BMI Shariah and Dow Jones Islamic Market (DJIM) World Index, underperformed their conventional counterparts in Q1, in part due to the strong performance of the Financials sector, which gained nearly 12% during the period. Apart from Asia Pacific, all regional Shariah and conventional benchmarks returned positive performance during the quarter.

Sector Drivers Led to Quarterly Underperformance

While global equities largely recovered from the global market sell-off of 2020, sector performance continued to vary widely into the first quarter of 2021. Although Energy led Q1 sector performance, its small weight had little impact on overall returns. Meanwhile, Financials—which is nearly absent from Islamic indices—heavily outperformed the broader market, and Information Technology—which tends to be overweight in compliant indices—underperformed on a relative basis. These two sectors, along with Health Care, accounted for a large majority of the Shariah underperformance during the quarter.

Exhibit 2 displays sector returns along with the effect of over- and under-weight sector allocations of the S&P Global BMI Shariah compared to its conventional counterpart. Over half of the S&P Global BMI Shariah underperformance during the period—1.5%—is explained by differing sector allocations, while 1.2% is explained by the inclusion process of individual Shariah-compliant stocks.

MENA Equities in Recovery

MENA regional equities gained considerably during Q1, as the S&P Pan Arab Composite advanced 12.4%. The S&P Saudi Arabia BMI led the way in the region, gaining 16.1%, followed by the S&P UAE, up 14.14%. Notably, the S&P Pan Arab Composite Shariah surpassed its conventional counterpart by 2.3% during the quarter, in large part due to significant representation of Saudi Arabia, which outshone regional peers.

For more information on how Shariah-compliant benchmarks performed in Q1 2021, read our latest Shariah Scorecard.

This article was first published in IFN Volume 18 Issue 15 dated the 14th April 2021

How are Custom Indexing tools helping Australian investors plan for superannuation and optimize broad market exposure? Take a closer look at the design process, objective, and performance of the Hamilton12 Australian Diversified Yield Index with S&P DJI’s Kenny Chan and Hamilton12’s Jason Hall.

What a difference a year makes. April 21, 2021, marks the one-year anniversary of the S&P GSCI’s low. Since then, we have entered a different economic, social, and geopolitical environment, and the S&P GSCI was up 60% as of April 19, 2021. On March 26, 2020, three days after the low in the S&P 500^®, I wrote a blog called Rapid Reset, discussing the market sentiment, what to look for in the short term, and potential structural shifts in commodities markets. This included the potential for a peak in commodities supply after many years of gluts in most commodities. Since this time last year, a dramatic reduction in oil production, loss of agriculture crop supply, and huge draws on industrial and precious metals coalesced to push commodities prices in some cases to new all-time highs. With changes in market dynamics, highly volatile scenarios played out, and the start of the 2020s displayed some of the highest volatility in recent history.

How have the commodities markets shifted to start this new decade? Themes that played out in the 2010s seem to have either hit the brakes or accelerated over the past year. The most prominent change involved energy. One year out from front-month futures crude oil prices dipping into negative territory, it seems unlikely that the oil producers still in business will ever again pump oil without regard for systemic macroeconomic risks. U.S. shale producers just posted the most bankruptcies for a first quarter since 2016, despite crude oil prices being up 30% YTD. With a global focus on green infrastructure and battling climate change, the energy transition has commenced. The world may never again be “swimming in oil.” Electric vehicles are a major driver behind the energy transition, as demand for fossil fuels will likely decrease over the long run. With more and more countries committing to carbon-neutral timelines, oil companies will have to adapt to stay relevant. Exhibit 2 shows the latest country net-zero and emissions targets compiled by S&P Global Platts, a division of S&P Global.

The last quarter of 2020 also marked a turning point in the grains market. For the first time in years, we witnessed a surprise to the downside in grain production in the western hemisphere. Several factors including weather events, farmers reducing acreage due to low prices, and lack of government subsidy assistance all played a role in this bullish supply-driven story. At the end of March 2021, market participants were surprised again by the USDA releasing a dramatically lower-than-expected reading for U.S. grain plantings this season. The tailwinds continued for the grain sector as corn and soybeans made new five-year highs.

Finally, industrial metals continued their bullish path off the lows and showed how closely tied they are to the post-pandemic economic recovery. Metals have an added benefit from the demand side, as most traded metals are used in some form or capacity in clean energy technologies.

April marks the 30-year anniversary of the S&P GSCI, the premiere global production-weighted benchmark for commodities. The S&P GSCI has stood the test of time and remains the global benchmark most closely tied to inflation and global economic growth.

The first quarter was a tough one for equity markets in the region, as a stronger U.S. dollar and the ongoing impact of the COVID-19 pandemic weighed on performance. Despite a 3.1% gain in March, the S&P Latin America BMI lost 5.8% in USD in Q1 2021, while the S&P 500^® gained 6.2%. At the country level, the story was mixed. Mexico and Chile finished the quarter in positive territory, while Brazil, Argentina, and Colombia all declined. Peru was nearly flat.

The currency exchange rate plays an important role in the performance of regional indices. Given the strength of the U.S. dollar, returns measured in local currency were much better. In Q1, the S&P Brazil BMI lost 10.2% in USD but only 3.1% in BRL. Similarly, the S&P Colombia BMI lost 15.7% in USD but only 9.5% in COP. Peru had mixed results, with the S&P/BVL Peru General Index generating a nearly flat return in PEN (-0.7%), but a positive one in USD (2.6%). Chile’s and Mexico’s equity markets performed strongly in Q1, posting slightly higher gains in their respective local currencies than in USD terms. Argentina was the only market in the region for which returns in ARS and USD were negative. Therefore, the cumulative returns in local currency for Q1 of the S&P Latin America BMI (which excludes Argentina) was nearly flat, at -0.09%.

Let’s review some of the more interesting trends (in local currencies) that happened in each market. In Argentina, despite having a tough Q1, the flagship S&P MERVAL Index had strong gains for the one-, three-, and five-year periods with annualized returns of 96.8%, 15.5%, and 29.9%, respectively. It is worth mentioning that market volatility was the highest in this region.

Q1 2021 resulted in negative returns for most Brazilian equity indices, except for the S&P/B3 SmallCap Select Index (3.0%) and the S&P/B3 Low Volatility Index (1.0%). What was exceptional was the longer-term performance of the S&P/B3 High Beta Index, which gained 105.9%, 25.9%, and 39.6% for the one-, three-, and five-year periods, respectively. The S&P/B3 Ingenius Index, based on international technology-driven companies listed on NYSE or NASDAQ and on B3 as BDRs, continued to do well despite currency differences (11.0% BRL).

The Chilean market finally made a comeback, generating strong performance in the short term with the flagship S&P IPSA gaining 17.3% in Q1. The Construction and Real Estate sectors, along with the Financials sector, topped the leader board as the best-performing industries in Chile.

Colombia was the worst performer for Q1, with important companies like BanColombia SA and Grupo de Inversiones Suramericana SA losing significant price appreciation when comparing stock prices from Dec. 31, 2020, to the end of March 2021. For the 12-month period, however, the S&P Colombia Select Index maintained a 24.2% gain.

Mexico’s equity indices displayed strong performance across short- and long-term periods. Mexico’s flagship index, the S&P/BMV IPC, gained 7.2% for Q1. Two indices that capitalized on the recent recovery and had the highest returns in Q1 were the S&P/BMV IPC 2X Leverage Daily Index, an index designed to reflect 200% of the return (positive or negative) of the S&P/BMV IPC, which gained 14.2% for the quarter, and the S&P/BMV IRT SmallCap, which tracks the performance of 14 small-cap stocks, and yielded 9.9% in Q1.

Another index that performed well was the S&P/BMV Total Mexico ESG Index (6.9% for Q1). This index serves as a broad market benchmark that considers sustainability screens in the selection and weighting processes of the components.

The Peruvian equities market resulted in decent returns for Q1, which helped sustain strong returns for the longer-term periods; however, the stronger U.S. dollar generated mixed returns. The S&P/BVL Peru Select 20% Capped Index, which was relatively flat for Q1 (0.4% in PEN and -2.9% in USD), gained 58.8% in PEN and 45.6% in USD for the one-year period ending March 2021. The S&P/BVL SmallCap Index was the local index with the best returns in Q1 (19.4% in PEN and 15.4% in USD).

It has been over a year since the onset of the COVID-19 pandemic. In its path, poverty and inequality have increased in most countries. In addition, the high unemployment rates¹ and upcoming presidential elections in countries like Chile, Ecuador, and Peru and mid-term elections in Argentina and Mexico could create uncertainty and volatility in the coming months. Nevertheless, the Latin American markets are proving to be resilient despite the many challenges they have faced.

For more information on how Latin American benchmarks performed in Q1 2021, read our latest Latin America Scorecard.

¹ Oliveros-Rosen, “Economic Outlook Latin America Q2 2021,” p 15.