Indexology^® Blog

The past few weeks have been extraordinary as U.K. politics and financial markets entangled, resulting in GBP-denominated debt becoming both shaken and stirred.

Gilts, bonds issued by the U.K. government, were hit particularly hard on the back of collateral calls in the liability-driven investment pension crisis. Gilts saw their yields reach multi-year highs, especially in the long duration segment.

As Rishi Sunak took over as Prime Minister at the end of October, some calm returned, after the bond vigilantes’ spell. While the new government focuses on sending a message of stability, for the GBP bond market, there is more of an afterthought to look at. Gilts’ reputation as safe-haven instruments has been hurt, but for the British pound sterling bond market, questions arise about what potential opportunities are out there for fixed income investors and how they compare to other markets.

Taking a step back and looking at the broad fixed income category, the global bond market has been having a tough year. The longer duration segment, which has been hit hard in the recent volatile market environment in the U.K. and globally, has seen the biggest losses due to rising interest rates. Exhibit 1 shows the YTD performance of the iBoxx £ Overall in different maturity buckets since the start of the year.

Exhibit 2 shows the daily YTD return of the broader GBP debt market over more than 20 years. The performance in 2022 clearly stands out even before the political and financial volatility in October.

We compared these results with the EUR- and USD-denominated debt markets, and they followed a similar trend. The difference, of course, is in the magnitude of these slumps. While iBoxx £ Overall YTD returns were at their lowest in mid-October, at -29.81% on Oct. 12, 2022, the iBoxx $ Overall declined about 16%, while the iBoxx € Overall shed about 17% over the same period. The energy crisis and hard-to-tame inflation have been key contributors to these declines, as central banks around the world have embarked on hiking interest rates.

The annual yields on the iBoxx £ Gilts spiked considerably amid the post-mini budget crisis, compared to the iBoxx Global Government Index, a basket of debt from developed markets. At their peak, U.K. gilt yields also outpaced those of Italy’s bond market, which posted multi-year highs after the country’s September elections. Amid the rally, the U.K.’s cost of debt narrowed its spread considerably even compared to emerging market yields on Oct. 12, 2022. Exhibits 5 and 6 are reminders of the respective duration and credit quality of these indices.

The past weeks have seen the GBP bond market move into new territories. As the shockwaves of these events are being digested, the fixed income market will no doubt stay vigilant of signs of cracks in other bond markets, as well as potential opportunities brought on by this market rout.

Commodities, represented by the broad-based S&P GSCI, rose 6.7% in October on the back of strength in the petroleum complex. During the month, the director of the International Energy Agency said the world is in the middle of “the first truly global energy crisis.” All petroleum constituents rose by double-digit percentage points. Livestock also rose, while agriculture, industrial metals and precious metals were flat or down.

The S&P GSCI Heating Oil was the hottest energy commodity, rising 23.56% last month. Backwardated futures curves across energy commodities continued to be one of the major tailwinds behind the strength of the market. U.S. President Biden threatened to raise taxes on oil companies if they do not work to lower gasoline prices by increasing production. The president of the American Petroleum Institute stated, “increasing taxes on American energy discourages investment in new production, which is the exact opposite of what is needed.”

The S&P GSCI Agriculture was a mixed bag of grains in October. The S&P GSCI Corn rose 2.39% and the S&P GSCI Soybeans rose 3.52%, while the S&P GSCI Wheat fell 3.96%—all of which were slight reversals compared to the prior month. The wheat market continued to gyrate in tandem with news surrounding the Ukraine-Russia grain deal. Lower projected corn and soybean yields in the U.S. increased bullishness in those grains when the World Agricultural Supply and Demand Estimates (WASDE) was released mid-month.

Industrial metals posted mixed performance in October. In particular, the slowdown of the Chinese economy has negatively affected metals. The only industrial metal without double-digit YTD underperformance was the S&P GSCI Nickel, which was up 5.79% YTD, but well off the highs from the start of the Ukraine-Russia conflict. That said, both the S&P GSCI Nickel and S&P GSCI Aluminum rose 3.4% for the month. These two industrial metals make up a combined 50% of the current metal cost in an average electric vehicle, according to S&P Global Commodity Insights’ latest biannual research.

The S&P GSCI Gold fell for the second month in a row, off 1.56% in October, as the U.S. Fed continued to hike rates to fight inflation. A hawkish monetary policy is the enemy of a non-yielding asset such as gold.

The S&P GSCI Lean Hogs rose 11.76% in October. Prior to this month, it was roughly flat for the year. This increase is an outlier compared to the usual seasonal lows seen historically in October. A surge in pork belly prices has helped drive performance, although ample supplies may lower enthusiasm in the market for the rest of the year.

To learn more about the S&P GSCI and related indices, check out our Commodities Theme Page.

This blog was co-authored by Tyrone Ross and Erik Smith.

Over the past 13 years, the cryptocurrency market has reached a cumulative market capitalization in the trillions. As of September 2022, Lukka Enterprise Data has listed 50 cryptocurrency assets with a market capitalization of over USD 1 billion. With an increasing number of investment options to choose from, many market participants are wondering:

• Should digital asset portfolios be diversified?
• Can diversification of cryptocurrency assets mitigate risk in a highly volatile asset class?

Generally speaking, financial advisors and investors tend to diversify broadly across asset classes and within asset classes. After all, actively picking investments is incredibly difficult. As Craig Lazzara, Managing Director and Global Head of Index Investment Strategy for S&P Dow Jones Indices, points out, “Returns are typically driven by a relatively small number of strong performers, which pull the index’s return above that of most of its constituents.” There are decades of historical performance data that support this observation in the equity markets. Does the same apply in the digital asset markets?

Let’s take a look at four S&P Digital Market Indices:

• S&P Bitcoin Index
• S&P Cryptocurrency MegaCap Index
• S&P Cryptocurrency LargeCap Index
• S&P Cryptocurrency Broad Digital Market Index

Looking at back-tested data, over the past five years (as of Sept. 30, 2022), the S&P Bitcoin Index and S&P Cryptocurrency MegaCap Index outperformed the broader cryptocurrency indices on an annualized risk-adjusted return basis. The S&P Cryptocurrency MegaCap Index, which combines Bitcoin and Ether into one index weighted by market capitalization, led the way in absolute returns, posting a 36.21% annualized five-year return. The S&P Bitcoin Index came in a close second on an absolute return basis, posting a 36.12% annualized five-year return. Similar to previous market downturns, Bitcoin has held up better than the vast majority of cryptocurrency assets in 2022.

However, over a three-year timeframe, Bitcoin lagged the more diversified crypto-asset indices in both absolute and risk-adjusted annualized returns. The S&P Cryptocurrency MegaCap Index, which includes Bitcoin and Ethereum, led the way during this timeframe (see Exhibit 2).

As we can see in Exhibit 3, Ethereum’s share of the total crypto-asset market cap has grown slightly since the beginning of 2017, now making up over 17% of the total digital asset market. Bitcoin’s market cap, which accounted for approximately 90% of the cryptocurrency market at the beginning of 2017, has fallen to around 39% dominance. This is still a high percentage compared to most asset classes.

So how could diversifying away from Bitcoin have affected portfolios? The data suggests diversifying would have resulted in higher absolute and risk-adjusted returns over the past three years, while underperforming Bitcoin over the past five years.

Closing Thoughts

As with any investment portfolio, timeframe, risk tolerance and risk capacity all play key roles. Similar to how investors had a difficult time gauging which technology companies would thrive following the internet boom in the 1990s, it is equally difficult to predict which cryptocurrencies will gain or lose market share in the future. With limited historical data to base our analysis on, we are left pondering what the future holds for this new asset class that is growing exponentially. The best way to make an informed decision on structuring a digital asset portfolio is to continuously learn about and evaluate this evolving market. Education comes first.

To learn more about the S&P Cryptocurrency Indices, please see https://www.spglobal.com/spdji/en/landing/investment-themes/sp-cryptocurrency-indices/.

A clever (yet ill-fated) character once said, “Chaos is a ladder.” The first half of 2022 was indeed full of chaos in many major markets, including South Africa; our latest SPIVA South Africa Scorecard for the region shows where the rungs were slippery and where active funds were able to climb the fastest.

Overall, the underperformance rate of actively managed South Africa equity funds over H1 2022 was well below recent full-year measures (see Exhibit 1), with nearly two-thirds outperforming the S&P South Africa 50.

Avoiding a small number of underperforming stocks had the potential to make a big difference. Within the S&P South Africa 50, 49% of stocks trailed the benchmark and 51% outperformed, but just a few stocks contributed the majority of the index’s -6.3% H1 performance. Luxury goods firm Compagnie Financiere Richemont S.A (CFR) and communications company MTN Group Ltd. (MTN) combined to account for two-thirds of the total index decline. As the largest weight in the index, and the second-worst performer over H1, CFR made the most significant impact on the benchmark’s returns (see Exhibit 2).

Returns were not distributed “normally,” creating an interesting challenge for stock pickers. The median S&P South Africa 50 stock return was -5.1% in H1, close to the index return, but the (unweighted) average stock return was 0.3%, due to the strong outperformance from a minority of large winners. Indeed, the outperformers averaged 23% excess return, while underperformers returned -11% on average. Even when excluding an outlier with more than 200% excess return during H1 (and a weight in the index of less than 1%), the average excess return of remaining outperformers was 16%. In other words: a manager’s chances of picking an underperforming or outperforming stock were nearly equal, but outperforming stocks were disproportionately rewarding to performance.

Based on the relative performance of the S&P South Africa 50 Equal Weight Index, tilting away from mega-cap names may have been one way for active managers to navigate a successful H1. The equal-weighted index outperformed the cap-weighted S&P South Africa 50 by 1.5% through H1, and in a perhaps positive sign for the full-year results, has continued to separate itself by an even wider margin since then (see Exhibit 4).

Reducing weights of the largest stocks in the benchmark remains a prevalent active management strategy, and one that may have benefited active managers in South Africa in the first half of 2022. So how did active managers do on a risk-adjusted basis? To find out, you’ll have to dive deeper into the SPIVA South Africa Mid-Year 2022 Scorecard. (Spoiler alert: some results are very different!)

Look inside the S&P 1500 and its core components as S&P DJI’s Hamish Preston explores the performance of Equal Weight and sector indices, as well as highlighting how positive earnings can influence performance.