IN THIS LIST

ETF Transactions by U.S. Insurers in Q1 2021

Taking a tactical approach to a new investment era

U.S. Equities Market Attributes June 2021

U.S. Equities Market Attributes May 2021

S&P Kensho New Economies Commentary: Q1 2021

ETF Transactions by U.S. Insurers in Q1 2021

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Raghu Ramachandran

Head of Insurance Asset Channel

INTRODUCTION

While the start of 2021 was not as volatile as the start of 2020, insurance companies still used ETFs actively.  Using quarterly trading data, we analyzed the trades and net flows of ETFs by insurance companies in their general accounts.  Although trade volume and net flows were down from Q1 2020, insurance companies still added USD 3 billion in ETFs to their general account portfolios and traded over USD 15 billion in ETFs.

ETF TRADES

In Q1 2021, U.S. insurance companies traded USD 15.2 billion in ETFs, representing a 38% reduction in the amount traded during the chaotic Q1 2020.  Roughly 66% of the trades happened at the end of the quarter, when both buy and sell volumes spiked (see Exhibit 1).

Exhibit 1

As of year-end 2020, only one-third of ETF holdings were Fixed Income ETFs.  However, in the first quarter, a little over half of ETFs traded were Fixed Income ETFs (see Exhibit 2). 

Exhibit 2

In the Equity space, Large Cap Equity dominated.  In Fixed Income, insurance companies once again concentrated their trades in Investment Grade Fixed Income (see Exhibit 3).

Exhibit 3

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Taking a tactical approach to a new investment era

The seemingly never-ending rollercoaster for economies and markets has sharpened the focus of the region’s leading asset owners on the need for long-term capital growth and portfolio diversification.

To achieve these two goals this year, there appears to be a preference among investors for listed securities in Asia and private market assets in North America. At the same time, the influence of technology as well as environmental, social and governance (ESG) factors is stronger than ever, both in terms of target assets and the investment process.

This is all based on the views of 105 senior investment executives from sovereign wealth funds, government entities, insurance companies, public and private pension funds, endowments, private banks and other asset owners across the Asia Pacific region.

They shared these insights as part of a survey by AsianInvestor, in collaboration with S&P DJI, conducted between March and April 2021, covering Hong Kong, Taiwan, Australia, South Korea, Japan, Singapore, Thailand, Malaysia, Indonesia, the Philippines and India.

Broadly, the consensus tallies with the relatively robust and fast recovery that S&P DJI sees as a driving theme for Asia, certainly compared with other parts of the world.

“This has been supported by government stimulus, accommodative monetary policy and large-scale investments. The recovery has been the key influence on rates, equity markets and valuations across the spectrum of asset classes,” said Tianyin Cheng, senior director, strategy indices at S&P DJI.

SUSTAINABILITY COUNTS

Against this backdrop, positioning for transition continues to dominate allocation decisions for many investors.

This reflects the importance of themes of tactical exposure for many respondents in 2021 – being more prominent than geographical diversity or taking a sector focus. And when investing in themes, respondents believe the highest risk-adjusted returns this year will come from ESG (26%), closely followed by transformative tech (21%) and healthcare and biotech (20%).

In line with the commitment to sustainability, respondents ranked the process of incorporating ESG factors via additional data and analytical tools as their preferred route to enhanced returns in a post-pandemic landscape.

“We have witnessed the focus on climate change for the last few years, but it is now at a turning point,” explained Cheng. “It is now about action rather than just talk, with investment money supporting the transition to a low-carbon economy.”

At the same time, implementing technology and better systems such as artificial intelligence and big data solutions is also high on the priority list for investors, as is their intention to more closely scrutinise the performance of external active managers. These approaches are expected to be much more effective than traditional ones, like taking on more risk by going down the credit curve or hiring more investment staff.

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U.S. Equities Market Attributes June 2021

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Howard Silverblatt

Senior Index Analyst, Product Management

KEY HIGHLIGHTS

U.S. Equities Market Attributes June 2021

MARKET SNAPSHOT

The S&P 500 continued up, posting 8 new closing highs in the 22 trading days (5 in a row, ending the month with 1 of them) and 34 YTD (124 trading days, with 11 of the 34 on the last trading day of the week). Even the fear of inflation (and the end of Fed stimulus) failed to stop the index from reaching new highs. Earnings and cash flow for Q1 2021 closed at all-time highs, with Q2 earnings expected to decline (and potentially rank as number 2 historically). If there were mask futures, they would be going down quicker than SPACs—but both would still be up YTD and year-over-year. The U.S. was reopening, as the first cruise ship left port (in Florida), and Americans did what they do best—spend, baby, spend. What may be unusual, however, is that they were not borrowing as much (can't say that about corporations or the government), but instead they started to spend all the money they didn't during the height of the COVID-19 pandemic. As for the non-U.S. markets (such as India, the U.K., Australia, or the WHO's outlook on China), many appeared to be in another wave of COVID-19, which will limit their reopening growth, as concern remained loud, but mostly in the background, that the U.S. could be vulnerable to their own new wave (due to a ~30% resistance rate to the vaccine).

However, the bottom line for June was similar to May, except with a much larger gain; the S&P 500 posted a return of 2.22% (30.17% annualized), compared with May's 0.55% increase, which was after significant gains in April (5.24%) and March (4.24%), while the Q2 2021 period posted an 8.17% increase (compared to Q1 2021's 5.77%, or Q2 2020's 19.95% rebound). Year-to-date, the return was 14.41%, as the post-COVID-19 gain (from Feb. 19, 2020) was 26.91%, with the index closing the month at a new high.

President Biden met with Republican leaders to discuss his infrastructure plan, proposing an additional USD 1 trillion program (to the projected USD 400 billion over the next five years), up from his previous USD 1.7 billion plan. Biden said he was committed to paying for the plan with corporate tax increases. The updated Republican plan was for USD 928 billion (over eight years).

The G7 nations (Canada, France, Germany, Italy, Japan, U.K., and the U.S.) agreed to back new rules intended to implement a minimum 15% tax rate on corporate profits, as well as taxing corporations where goods and services are sold. Details weren't worked out, as agreement among the G20 nations would first be required. In the U.S., tax policy change was seen as moving slowly (due to politics, as well as the recovery), with no significant change expected by the Street in 2021.

Biden's eight-day trip to Europe (his first) had two goals. The first, to meet, greet, and make friends with European allies, as he met with some leaders privately, and met with the Queen, while attending the G7 meeting (with a noticeably more friendly greeting than the past few years). The second goal (and highlight) was his meeting with Russian President Putin (in Geneva); the meeting was civil and politically correct, with no agreement, but it represented the start of a dialog.

The EU and U.S. announced a five-year truce (compared to a settlement) in their 17-year dispute (which had grown worse over the past few years) regarding subsidies for Airbus SE (EADSY) and Boeing (BA). Discussions between Biden and U.S. senators on a USD 1 trillion infrastructure bill appeared to move forward, as a bipartisan group of senators signed on. Considering inflation, it's not Jimmy Carter's time (when it was in the double digits), but prices are higher, and while I won't debate "transitory," we are paying more today. Biden revoked Trump's orders limiting TikTok and WeChat, as he directed the Commerce Department to evaluate software applications with ties to foreign governments.

Canada said it would permit entry to its country for vaccinated travelers, as the U.S. loosened foreign travel restrictions. The Biden administration said it would donate 500 million Pfizer vaccines to non-U.S. countries (200 million in 2021 and 300 million in the first half of 2022). The COVID-19 delta variant continued to spread, as Hong Kong, Portugal, and Spain imposed new restrictions (joining Italy), with Sydney in a full two-week shutdown. Meanwhile, the U.S. reopened, with the variant accounting for a larger percentage of the diminishing cases.


U.S. Equities Market Attributes May 2021

KEY HIGHLIGHTS

U.S. Equities Market Attributes May 2021

MARKET SNAPSHOT

The S&P 500 continued up in early May, setting one new closing high, though changing its tune several times. It started singing, "Start spreading the news" that the U.S. would fully reopen soon. It then met resistance in the form of inflation and prices, and the tune changed to "Kiss the market goodbye, and point me toward ease and stimulus, we did what we had to do for ‘huge' gains, won't forget, can't regret, what we did for gains." The refrain then changed to "To mask or not to mask, that is the question. Whether 'tis nobler in the business model to suffer the suits and slings of (some) outrageous customers, politicians, and employees, or clear the path to let the flow of funds run like a river into corporate, even if its flow could change like the circled orb," as the index started searching for a base level, with reallocation, profit taking, and getting ahead of itself fighting the fear of losing out, COVID-19 optimism, and a consumer-led spending spree. The bottom line for May was a 0.55% gain, after April's 5.24% gain, March's 4.24% gain, and February's 2.61% gain (January was down 1.11%). The YTD gain was 11.93%, as the post-COVID-19 gain (from Feb. 19, 2020) was 24.16%, with the S&P 500 0.67% off its May 7, 2021, closing high.

The S&P 500 closed at 4,204.11, up 0.55% (0.70% with dividends) from last month's 4,181.17 close, when it was up 5.24% (5.34%), and the prior month's 3,972.89 close, when it was up 4.24% (4.38%). The three-month return was 10.31% (10.72%), the YTD return was 11.93% (12.62%), the one-year return was 38.10% (40.32%), and the index was up 24.16% (25.93%) from its pre-COVID-19 Feb. 19, 2020, closing high. The Dow® broke through 35,000 for the first time (May 10, 2021, 35,091.56), but it did not close there; it ended the month at 34,529.45, up 1.93% (2.21% with dividends) from last month's 3,874.85 close, when it was up 2.71% (2.78%) from the prior month's 33,072.88 close, when it was up 6.62% (6.78%). Over the three-month period, The Dow was up 11.63% (12.18%), up 12.82% (13.76%) YTD, and up 36.03% (38.79%) over the one-year period.

As for the Wall Street saying of "sell in May and go away," using the six-month change from the close of May to the close of October, this has been true 34.4% of the time in S&P 500 history (from 1928). However, it has not worked in the past nine years (based on total return, eight for stock price only).

A federal judge set aside the national moratorium on evictions (started under Trump and expanded under Biden), ruling that the CDC lacked the authority to issue it; the impact is still developing, but could be substantial. Treasury Secretary Yellen (formerly the Chair of the FOMC) said that "it may be that interest rates will have to rise somewhat," then pulled back on the statement, saying, "it's not something I'm predicting or recommending." The market reacted by pulling back, as interest rates and inflation concern grew, with the debate being when and how quickly they would rise. Biden will meet with Russia's President Putin on June 16, 2021, in Geneva.

Biden released his fiscal Oct. 1, 2022, USD 6 trillion budget (USD 1.8 trillion deficit), which included his USD 4 trillion American Jobs Plan and American Families Plan bills as well as a tax increase to help pay for the expenditures. The proposal was expected to meet with strong opposition from Republicans, but with Democrats controlling all three houses (the White House, Senate, and House of Representatives), the passage of significant parts is expected.

The COVID-19 spread and death rate continued to get worse in India (from cities into rural areas), as the country set a new global daily case record at 414,188, parts of the country went into lockdown, and medical shortages became national. Meanwhile, other parts of South Asia saw rising cases and took precautionary actions. In a quick reversal, Singapore and Taiwan, which had had a low number of COVID-19 cases and a slow vaccination rate, posted sharp increases in cases.

U.S. vaccine rates continued to slow, as Biden took steps to encourage the population to get vaccinated, setting a goal of 70% receiving at least one shot by July 4, 2021 (U.S. Independence Day).

The CDC approved Pfizer's COVID-19 vaccine for individuals as young as 12 (it was previously 16), meaning 17 million youths became eligible for vaccination. The CDC announced that individuals who were fully COVID-19 vaccinated did not need to wear a mask in public (they're still required on planes, trains, and buses, and in most municipal buildings), encouraging those who hadn't been vaccinated to do so. U.S. President Biden said the U.S. would share at least 20 million doses of U.S.-authorized COVID-19 vaccines with other countries by the end of June. The U.S. also pledged 60 million doses of the AstraZeneca vaccine, once it is approved for use in the U.S. The EU said it would create a vaccine certificate system to aid in travel within the EU.


S&P Kensho New Economies Commentary: Q1 2021

Top 3 From Across the New Economies

Virtual Reality (+71.33%)
The subsector benefitted from growth in many areas, including augmented reality smart glasses, computer vision, and gaming. Two companies focused on AR-headsets, Vuzix and Microvision, produced very strong performances over the quarter, followed by 3D Systems. Vuzix reported its best quarter in its corporate history and Microvision announced it has made further improvements in its LIDAR technology, which has applications in autonomous vehicles. 3D Systems, which creates VR simulations for medical procedures in addition to 3D printers, announced strong financial results for 2020, and raised guidance for 2021.

Distributed Ledger (+59.57%)
All things crypto surged in Q1; along with the price of Bitcoin, came a focus on NFTs and other uses for blockchain technology, such as for settlement. The biggest individual contributor was Riot Blockchain, returning 213% for the quarter, boosted by continued growth in the number of coins it has successfully mined, coupled with continued rise in the price of Bitcoin. Worth noting, this subsector had a 0.43 correlation to the price of Bitcoin in 2020. Magnachip Semiconductor also contributed, benefitting from a take-private transaction announced on March 26.

Nanotechnology (+35.08%)
Nanotechnology saw strong performance across the subsector, as it was positively impacted by a strong Q1 from the semiconductor and pharmaceutical industry groups. Semiconductor companies saw revenue gains in Q1, possibly driven by the global chip shortage. Vuzix and Luminex Corp were both big contributors, with the latter returning 38.4% for the quarter, as the company reported record revenue for 2020.


Bottom 3 From Across the New Economies

Cybersecurity (+0.58%)
Cybersecurity struggled in Q1, with the malaise in software companies weighing on sector returns, owing to their high valuations and rising interest rates. The biggest detractors were Mimecast and Tenable. The former was a victim of the SolarWinds hack and had some of its source code was stolen. Tenable Holdings issued muted guidance for 2021, citing continued uncertainty from the effects of the pandemic.

Genetic Engineering (-0.95%)
Genetic Engineering was beset by profit-taking and a rotation out of growth stocks in the second half of Q1. The development of COVID vaccines had acted as a tailwind for this group in 2020, and investors appeared to be locking in the resultant gains. Stock-level performance in the subsector tended to be driven by idiosyncratic factors. Precigen and Amicus Therapeutics underperformed as they revealed underwhelming earnings numbers for 2020. Intellia Therapeutics, on the other hand, had a strong Q1, as it presented positive pre-clinical data for its in-vivo treatment of sickle-cell disease.

Future Payments (-2.14%)
Future Payments was impacted by uneven performance from banks and payment processors, as uncertainty weighed on loan balances and transaction volumes. Visa reported a 6% drop in Q1 revenue, driven primarily by falling cross-border transaction volume. Q2 Holdings also reported disappointing earnings, as revenue stagnated and costs increased.


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