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Investment in Innovation: Opportunities for Potential Outperformance across the Market-Cap Spectrum

S&P GIVI® Japan and Major Single Factors Q2 2020

U.S. Equities Market Attributes June 2020

U.S. Equities Market Attributes May 2020

U.S. Equities Market Attributes April 2020

Investment in Innovation: Opportunities for Potential Outperformance across the Market-Cap Spectrum

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John van Moyland

Managing Director, Global Head of S&P Kensho Indices

It is of no surprise to anyone following the markets of late that the returns of larger companies have generally fared better than their smaller brethren during the pandemic.  The extent of this dynamic was brought into sharp relief when looking at YTD total returns through May 29, 2020: the large-cap S&P 500® returned -4.97%; the S&P MidCap 400® returned -13.86%; and the S&P SmallCap 600® returned -20.81%.  In the small-cap segment, the Russell 2000 reflected the same story over this period with a return of -15.95%. 

Meanwhile, the equivalent market-cap segments of the S&P Kensho New Economies Composite Index, which seeks to capture the industries and innovation of the Fourth Industrial Revolution, have significantly outperformed their broad market peers by 3.96%, 9.35%, and a substantial 16.49%, respectively, over this same time period (see Exhibit 1).

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This persistent outperformance across market-cap segments may illustrate the positive impact of the security selection effect and underscores the benefits of a robust, disciplined, and transparent framework when investing in innovation and growth.

This commentary will discuss our approach to capturing the New Economies and explore how persistent this pattern has been over different time periods and weighting strategies.  Let’s start out with some context setting.

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S&P GIVI® Japan and Major Single Factors Q2 2020

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Tianyin Cheng

Senior Director, Strategy Indices

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Izzy Wang

Analyst, Strategy Indices

The S&P GIVI (Global Intrinsic Value Index) Japan underperformed its benchmark index, the S&P Japan BMI, by 6.09% in Q2 2020. Since its launch in March 2012, the S&P GIVI Japan has underperformed its benchmark index by 62 bps per year, with a tracking error of 2.68%.

Following the sharp decline in Q1 2020, the Japanese equity market rebounded by 11.77% in Q2 2020, as measured by the S&P Japan BMI. However, the S&P Japan BMI posted -8.31% YTD. As in other major markets, the recovery in Q2 2020 was mainly boosted by government stimulus and good news in the fight against COVID-19. This quarter, the Japanese government approved a record stimulus package equaling about 40% of GDP to prevent COVID-19 from causing further economic deterioration. After lifting the National State of Emergency in late-May, the Japanese economy started to gradually reopen. While partially encouraged by these positive signs, investors stayed cautious amid the uncertainties around U.S.-China tensions and a second wave of COVID-19 cases. 

As the economy gradually reopened, almost all sectors showed signs of rebounding. Materials, Consumer Discretionary, and Industrials, which were severely hurt in Q1 2020, had strong comebacks, with double-digit returns this quarter. Hotels and Industrial REITs contributed the most to the mild recovery in Real Estate, while Office provided some drag. Information Technology was the bestperforming sector, due to increased demand for hardware and software support in the new normal of internet-based life. Health Care and Communication Services, the two sectors whose performance benefited from the COVID-19 crisis for providing healthcare products and supporting social distancing practices, respectively, continued to lead in Q2 2020 and reversed the loss from the previous quarter. Utilities was the only sector that posted a negative return, largely due to the dire economic projection. 

The underperformance of the S&P GIVI Japan in Q2 2020 was mainly due to the selection effect in Industrials and Information Technology.  

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U.S. Equities Market Attributes June 2020

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Howard Silverblatt

Senior Index Analyst, Product Management

KEY HIGHLIGHTS

MARKET SNAPSHOT

The number of new daily cases of COVID-19 reported in the U.S. rose to over 47,000, a record level; over 2.6 million people in the U.S. were infected (10.5 million globally), with over 127,000 deaths (511,000). Within the U.S., progress on combating the virus remained uneven (and unsure), as New York City, which was hit first and became an epicenter, started to open up, but several states reported significant increases in infections and hospitalizations (Arizona, California, Florida, and Texas). Some states considered reversing openings (Florida, Texas, and others have) and reinstating some restrictive procedures, which have become highly political. In a sign of the regional turnaround situation, New York (along with Connecticut and New Jersey) said it would require out-of-state visitors from “hot spots” (16 specific states) to quarantine for two weeks, similar to what some states did to those visiting from New York earlier in the year. Globally, the EU said it would reopen its boarders to nonessential workers from 14 countries (and possibly China), as it barred the U.S., citing the increasing COVID-19 reports. The bottom line for the virus is that no one knows, as for some, the situation has become more correlated with their political views than with science. The bottom line for the market, which believes in the market, is that eventually there will be a workaround (a cure, a treatment), and that the economy will recover. To that end, as stated, several areas that were hit early have improved, but others that were not as severely affected are now starting to be, with their reaction still in progress.

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U.S. Equities Market Attributes May 2020

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Howard Silverblatt

Senior Index Analyst, Product Management

KEY HIGHLIGHTS

MARKET SNAPSHOT

The grand Reopening of the U.S. began in May—come, buy, spend (if you have it; otherwise use your stimulus money), and enjoy the solitude of six feet as you scan your iPhone to pay (or for you oldies, use that archaic piece of plastic that you have not been using lately).  If by some chance you need to cough (as they told Arlo Guthrie), “turn your head.”  The U.S. started to reopen as the Memorial Day holiday kicked off not just the start of summer, but a return to what will be the new normal, with no one knowing what that will be, but most wanting to at least try.  The anticipated opening has been what has kept the S&P 500 up—36.06% from its recent March 23, 2020, low (down 10.10% from its Feb. 19, 2020, closing high).  Anticipation has been nice (did someone say, “Buy on anticipation, sell on reality?”), but now reality will start, along with the learn-as-you-go process and slow (or fast—we don’t know) continuance of opening; the key questions are, “If you open, will they come and spend?” and, “If they come, will they get sick?”  At this point, an opening, any opening, is welcome, as the Street has mostly dismissed 2020 earnings and is looking toward recovery signs, which are expected to be seen in a turn up in earnings in the second half of 2020—and that will be the true reality test for the Street.  At 27.7 times the expected 2020 EPS, there is no question as to why everyone is wearing a mask, as the Street is priced for 2021 (and even then it is high).  If we see the upward turn in the second half, then the current levels may be justified, but if not, the Street will need to reprice, and for those of you who quickly forget, the last repricing was from the Feb. 19, 2020, high to the March 23, 2020, low—a 33.9% fall.  In the “putting your money where your mouth is” reopening, the first major IPO since the virus spread to the U.S. was done, as insurance broker SelectQuote (SLQT) IPOed at USD 20, closing the month at USD 27.52, up 37.6%—ah, the good old days.

The U.S. market went into May after its best month (12.68%) since January 1987 (13.19%), as the focus changed to the start of the Reopening of the U.S. (most started on May 18, 2020, ahead of the Memorial Day holiday), with regions varying their approach and depth.  The initial key issue for the reopening in May was if consumers would come back, and June’s key issue will be if they would be safe to do so and spend.


U.S. Equities Market Attributes April 2020

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Howard Silverblatt

Senior Index Analyst, Product Management

  • The S&P 500® was up 12.68% in April, bringing its YTD return to -9.85%.
  • The Dow Jones Industrial Average® gained 11.08% for the month and was down 14.69% YTD.
  • The S&P MidCap 400® increased 14.06% for the month and was down 20.20% YTD.
  • The S&P SmallCap 600® returned 12.60% in April and -24.49% YTD.

The U.S. market went into April focused on survival, and it exited focused on the Reopening of the U.S. There are now two key questions: “Is it safe?” and “If you open it, will they come?” Markets wanted to believe, and reacted positively to the idea of a light at the end of the tunnel, even as few knew how far away the light was (and some warned that it was not light, but an oncoming train). Data for Q1 2020 showed the impact of the virus, as Q2 2020 was expected to be worse. For Q1 2020, 57.0% of the market value has reported earnings, with 177 of the 260 issues beating the 27.4% lowered estimates, and 165 of the 256 beating on sales. The Q2 2020 estimates declined 41.2% from year-end 2019, as Q3 2020 declined 27.4%, Q4 2020 declined 18.6%, and full-year 2020 declined 28.5%; 2021 estimates have started to decline, off 9.0%. With 44.1% reported, buybacks are running stronger than expected for Q1 2020.

As for Q2 2020, don’t expect anything, and you won’t be disappointed. For Q2 2020 dividends-to-date, 19 S&P 500 issues increased, 12 decreased, and 12 suspended, for a net change of USD -13.4 billion (USD -17.4 billion YTD). As for employment, it was a month to survive, as the six-week total Unemployment Claims was 30,307,000, with the employment report (May 8, 2020) expected to show an unemployment rate in the area of 20%. Overall, however, trading was more focused on perception and fundamentals, compared with the knee-jerk reactions of late February and March. May, however, could see some of that volatility come back, as the market reacts to each news item on the Reopening of the U.S.


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