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S&P Latin America Equity Indices Quantitative Analysis Q1 2020

S&P Latin America Equity Indices Quantitative Analysis Q2 2020

S&P GIVI® Japan and Major Single Factors Q1 2020

U.S. Equities Market Attributes March 2020

U.S. Equities Market Attributes February 2020

S&P Latin America Equity Indices Quantitative Analysis Q1 2020

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Michael Orzano

Senior Director, Global Equity Indices

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Silvia Kitchener

Director, Global Equity Indices, Latin America

S&P Latin America Equity Indices Commentary: Q1 2020

This new decade has not really started well—if only we could jump straight to 2021. Amid the overwhelming impact of the COVID-19 pandemic on public health and on the economy, perhaps what resonates best is that “this too will pass.”

U.S. equities, which serve as a guidepost for the global economy, surpassed prior all-time highs in volatility. VIX®, also known as the “fear gauge” has not reached similar highs since the global financial crisis (GFC) in 2008. The higher the uncertainty, the higher the option prices that are used to calculate VIX. The precipitousdrop in oil prices following a price war between Russia and Saudi Arabia threatened a collapse of the Energy sector, adding to the uncertainty in the U.S. and globally. Unemployment in the U.S. continued to rise—in the last two weeks of the quarter, nearly 10 million American applied for unemployment benefits following the shutdown of thousands of businesses. It’s expected that this number is only a sign of further job losses to come and that unemployment filings will double in the coming weeks. Many impacted businesses are in the travel, entertainment, restaurant, retail, and real estate industries.

What about Latin America? Like a tsunami that started in Asia then ravaged Europe, COVID-19 and its effects are now flooding the Americas. Despite the closing of borders and quarantines, the pandemic continues to sweep the continent. Governments have started to institute policies to minimize the public health and the economic impact. Similar to the U.S., which has approved a USD 2 trillion stimulus package to help mitigate the effects of the pandemic, Brazil has approved around USD 30 billion. Peru is also reviewing a similar package. In Chile, the president approved a USD 12 billion package. In Argentina, the World Bank will lend USD 300 million in emergency funds. Colombia and Mexico have not yet announced any major economic measures at this time. The question many ask is, will all this be enough? In the midst of uncertainty, the answer depends on how quickly the pandemic recedes and life goes back to normal.

According to S&P Global’s rating analysts, it is expected that the outbreak will push Latin America into a recession in 2020, recording its weakest growth since the GFC. They have also forecast that GDP will contract by 1.3% in 2020, before bouncing back to a growth rate of 2.7% in 2021. Finally, the length of the recession—although potentially worse in some countries—may be much shorter: only two quarters are projected versus six quarters during the GFC.1

Latin American markets underperformed global markets during the first quarter. All gains from the previous years were completely wiped out. The S&P Latin America 40 posted the worst quarter on record, ending at -46% in USD terms. In comparison, the S&P 500®, which also had the worst quarter since 2008, lost 20%.

No economic sector was spared in the rapid downturn, as companies in important industries like energy, mining, and financials were hit hard. The average stock price drop for members of the S&P Latin America 40 was around -45% for the quarter. The Energy sector of the S&P Latin America BMI performed the worst among the 11 GICS sectors (-61%). Health Care had a difficult quarter (-45%), but thanks to its strong past performance, it lost a lot less for the mid-term periods. Looking at individual markets in local currency terms, Argentina’s S&P MERVAL Index lost 41.5% for the quarter. Brazil and Colombia followed, returning -36% and -32%, respectively, as measured by the S&P Brazil BMI and the S&P Colombia Select Index.

In a sea of red for the quarter, in Mexico some indices were able to stay in the black. The S&P/BMV IPC Inverse Daily Index, which seeks to track the inverse performance (reset daily) of the S&P/BMV IPC, gained 23%. The following three indices also did well: the S&P/BMV MXN-USD (26%), the S&P/BMV China SX20 Index (9.4%), and the S&P/BMV Ingenius Index (9.4%). The latter two indices are designed to measure international stocks trading on the Mexican Stock Exchange, and their strong performance is largely driven by the depreciation of nearly 20% of the Mexican peso relative to the U.S. dollar in Q1.

The first quarter is done, and the second quarter is looking gloomy. Comprehensive relief efforts are underway to help citizens and support our economies, and we can only hope for the best while we continue to tread carefully.

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S&P Latin America Equity Indices Quantitative Analysis Q2 2020

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Michael Orzano

Senior Director, Global Equity Indices

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Silvia Kitchener

Director, Global Equity Indices, Latin America

S&P Latin America Equity Indices Commentary: Q2 2020

We have made it through the first half of 2020. Despite the continued spread of COVID-19 wreaking havoc on public health and the global economy, the markets did surprisingly well during Q2. In the U.S., the equity market rebounded from Q1, driven by government stimulus packages and the easing of restrictions imposed during the pandemic. The S&P 500® gained 20.5%, while the S&P Latin America 40, which is designed to measure the 40 largest, most liquid companies in the region, followed close behind, gaining 19.5%. However, Latin America was still deep in the red YTD, down 35.9%.

Among S&P Latin America BMI sectors, Information Technology (63.2%), Consumer Discretionary (47.6%), and Energy (41.2%) were the best performers for the quarter. In this new era of working, shopping, and recreation from home, online-based companies like Brazil’s PagSeguro Digital and StoneCo Ltd, which help businesses manage their e-commerce services, seem to be booming in emerging markets, as shown by their price appreciation. It will be interesting to see how industries quickly adapt to the “new normal” and not only survive, but also thrive.

In terms of countries, Argentina led the pack with the S&P MERVAL Index gaining 58.7% in local currency for the quarter. Brazil came in second, with a return of 31.2% as reflected by the S&P Brazil BMI. Peru’s S&P/BVL Peru General Index returned 16.7%. Chile’s S&P IPSA also had a strong quarter, with a gain of 13.5%. Colombia barely stayed afloat, with a lower return of 1.4% for the S&P Colombia BMI. Year-to-date, the countries’ returns were still in the red, with Colombia the worst and Argentina at the top with single-digit negative returns. There is still a lot of work ahead before the region stabilizes. Pre-pandemic, there were already significant domestic troubles: social unrest in Chile, economic woes in Argentina, and political instability in Brazil, among other issues. Added to this mix, the pandemic of the century and the economic damage it is leaving behind will likely make for a tough recovery.

Despite the strong quarterly returns, many economists1 (not surprisingly) are predicting an uphill battle for the region. As the COVID-19 pandemic spreads and conditions worsen in several countries, S&P Global Ratings economists are reducing the 2020 GDP growth forecast to a contraction of roughly 7.5%. Growth for 2021 is expected to be around 4% and economic recoveries are expected to be slower than originally predicted. To put it in context, GDP for the U.S. is forecast to grow 4.8% for 2021.2 S&P Global Ratings expectations are that economies that implemented strong policy support, such as Chile and Peru, may have “smaller permanent GDP losses.” It adds that the story may be different in countries like Mexico and Brazil, where support has been more limited.

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S&P GIVI® Japan and Major Single Factors Q1 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 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.

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U.S. Equities Market Attributes March 2020

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Howard Silverblatt

Senior Index Analyst, Product Management

KEY HIGHLIGHTS

MARKET SNAPSHOT

There’s nothing new I can add; be safe and use common sense about going out.  If there is something you can do for others, without putting yourself (or your family) at risk, do it.  From an investment side, know what you can know—your portfolio, your liquidity and access, your current and expected needs, and your tolerance level for losses.

The only real March issue was COVID-19; the specifics were how long it would last and how deep would it go.  The immediate impact was seen in the closing of much of the global economy.  After a three-day rally, the Dow Jones Industrial Average posted over a 20% gain, which was classified as a bull run in a bear market.  To be out of the bear market, the index needs to close above its previous high.  Both the one- and three-month U.S. Treasury rates went negative for a short period of time, an event that last occurred in 2015.  The bar talk is gone, since the bars are closed, but the web chatter is only God knows what to do now.  And the market surely was not God, because it did not know, with the telling tale being volatility; the average intraday high/low S&P 500 price rate for 2019 was 0.85%, as 2020 was 2.57% YTD (2008 was 2.81%), with March at 5.34% (October 2008 was 6.92%).


U.S. Equities Market Attributes February 2020

KEY HIGHLIGHTS

MARKET SNAPSHOT

As February came to a close, many felt like the sky fell and the world was coming to an end.  The last week of the month brought back-to-back 3% declines and a 4% decline, hitting those investors and traders who had only known an 11-year bull market, who complained that no one had told them that this could happen—yet, there was no panic on the Street.  Trading (while one-sided) was managed, and since no one uses phones anymore there were no margin calls and no reason for anyone to overreact.  For us old guys, it was déjà vu (and a chance to retell our war stories at the bar), as the Street’s initial knee-jerk reaction (which many say was late in coming) changed to accepting a direct impact on the U.S. from the coronavirus, a greater economic impact from supplies, and more damage from the potential impact on consumer spending—which has supported sales—as corporate expenditures have disappointed (and, at this point, appear to have the greatest potential for negative short-term economic impact).

The damage, however, was real (for old and young), as the S&P 500 declined 11.49% for the week, off 12.76% from its Feb. 19, 2020, closing high, down 8.41% for the month and down 8.56% YTD, to enter an official correction point (in the same month in which it posted six new closing highs), dropping USD

3.58 trillion from the highs (as global markets lost USD 6.99 trillion) and ending the month down USD 2.24 trillion (with the global market down USD 4.87 trillion for the month).  Interest rates dropped as a flight to safety saw 10-year and 30-year U.S. Treasury Bonds trade at all-time lows (closing at 1.15% and 1.68%, respectively), with the Street pricing in interest rate cuts from the U.S. Federal Reserve for March and April (with some talk of a 0.50% cut in April).  Oil broke under USD 45 (closing at USD 45.26), after being over USD 63 in January of this year.  Companies started to warn on Q1 2020 (Q1 estimates have declined 5.0%, and more declines are expected, as approximately 100 companies have warned), as the first case of a non-travel related instance of the coronavirus was reported in California.  The U.S. expanded its response; Trump put Vice President Pence in charge.  Another bar discussion remained as to whether the coronavirus was the event or an event.  How much of the market reaction was due to the virus event, or was the market looking for a reason to take profits, after setting new highs without any major pullback (the S&P 500 posted a new closing high on Feb. 19, 2020).  The current answer appeared to remain (as it was for last month’s pullback) that it was time for a pullback, given “we” were all looking for one, with the new take (now by almost all that were talking) that the virus posed the greatest danger to profits and markets—right here in the U.S.A.  And since the spread and impact are not under the control of the Street, the only thing investors could do is prepare and react.  The bottom line for now is that the Street has accepted the coming impact on stocks and adjusted its pricing, with the key question being what will actually happen, as the market reacts to perception first, and facts second.


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