The S&P GIVI (Global Intrinsic Value Index) Japan outperformed its benchmark index, the S&P Japan BMI, by 40 bps in Q1 2020. Since its launch in March 2012, the S&P GIVI Japan has outperformed its benchmark index by 13 bps per year, with a tracking error of 2.44%.
2020 has gotten off to a bad start. The Japanese equity market, as measured by the S&P Japan BMI, declined by 17.96% in Q1 2020, which was the worst-performing quarter since the GFC. Amid the concern over the global economy’s outlook when China placed itself on lockdown due to COVID-19 in January, the Japanese market saw a mild decline. After oil prices crashed and the virus threw various countries into chaos in March, the worldwide economic slowdown became real, and Japan had to join the global fight against COVID-19. On March 23, 2020, the S&P/JPX JGB VIX®, which measures the 30-day forward volatility of 10-year JGB futures and represents the macroeconomic stability of Japan, rose to an all-time high of 6.81 and closed at 4.77 for Q1. Stressed investors were resorting to extreme behavior amid the uncertain economic outlook and pressure on market liquidity.
In the COVID-19 crisis, sectors appeared to be the main driver of performance, with a large gap between winners and losers—the difference between the best- and worst-performing sectors was 24.74%. On one hand, the sharp decline in consumption demand and shortage of supply heavily hit several cyclical sectors. Energy was the worst performer under the pressure of low demand and the collapse of Saudi-Russia negotiations. Real Estate was severely affected, especially in the hotels and malls segments. On the other hand, traditional defensive sectors, such as Utilities and Consumer Staples, were the best performers. Health Care outperformed, as demand for healthcare products surged this quarter and hopes were on biotech companies producing vaccines/testing tools. Finally, the increase in social distancing boosted the use of internet-based products, which favored Communication Services.
The outperformance of the S&P GIVI Japan was mainly due to the selection effect, especially in Information Technology and Communication Services.