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S&P Latin America Equity Indices Quantitative Analysis Q3 2020

U.S. Equities Market Attributes September 2020

U.S. Equities Market Attributes August 2020

U.S. Equities Market Attributes July 2020

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

S&P Latin America Equity Indices Quantitative Analysis Q3 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: Q3 2020

Overall, Latin American equities remained flat (-0.2%) in USD terms, as measured by the S&P Latin America BMI, a broad, regional index designed to measure the performance of 289 stocks from Brazil, Chile, Colombia, Mexico, and Peru. However, the S&P Latin America 40, representing the 40 largest (by market cap) and most liquid stocks, dropped a full 2.0% for the quarter amid the continued ravaging of COVID-19 on public health and the local economy.

On the economic front, S&P Global Ratings’ analysts recently reported that Latin America is in the middle of a recovery. However, the 2020 GDP forecast for all countries in the region will remain contracted. Due to strong exports to China and less stringent lockdowns, Brazil’s economic contraction will be less severe than was originally forecasted, while other countries like Argentina, Colombia, Mexico, and Peru will be worse off than expected. Meanwhile, Chile is very much on target. Many variables will affect the depth and speed of the recovery as countries try to emerge from the worst pandemic in more than 100 years.

At the sector level, Information Technology, Materials, and Industrials were the winners, with positive returns of 19.1%, 15.2%, and 8.3%, respectively for Q3 2020. The worst performers were Energy, Utilities, and Financials, losing 9.1%, 6.8%, and 6.4%, respectively.

Argentina’s economy is one of the most affected in the region, but economists expect Q3 2020 to be the start of its gradual stabilization. S&P Global Ratings has raised the country’s rating based on a new proposal to restructure its debt in order to avoid another sovereign default. The S&P MERVAL Index gained 7% in ARS for the quarter, with the S&P/BYMA General Construction Index leading the sector board (up 42.5%); the biggest losses came from the Energy sector(-8.9%).

Brazil’s equity market was nearly flat, with the Brazil 100 Index (IBrX 100) and the S&P Brazil BMI gaining 0.0% and 0.7%, respectively. This may be a first step in the right direction, with the economy rebounding during Q3, primarily driven by increased demand in commodity and food exports. Not surprisingly, the S&P/B3 Momentum Index (up 8.5%) and the S&P/B3 High Beta Index (up 5.9%) did well. These smart beta indices are designed to measure stock performance while factoring in the sensitivity of the market and its movements. Likewise, the S&P/B3 Ingenius Index (up 21.0%) continued to generate extraordinary returns in the midst of the pandemic, benefiting from the performance of technology-driven stocks.

Chile is not only struggling with the pandemic, but it is also in the middle of a major potential political change, with an upcoming referendum for a new constitution. All this uncertainty is keeping the equity market in the red, with the S&P IPSA dropping 8.1% in Q3. S&P Global Rating’s economists, however, have been more optimistic about a quick economic recovery in Chile, given the “strong government support for labor markets and business.” Chile’s shining spot was in the mining sector, with the S&P/CLX Natural Resources Index gaining 9.6% in Q3.

Colombia and Peru generated strong results. The S&P Colombia Select Index gained 7.3% for the quarter. Among Peruvian equity indices, the S&P/BVL Peru Select 20% Capped Index was the best performer (up 9.3% in PEN and 7.4% in USD) for Q3, aided by the high returns of the mining sector, as the S&P/BVL Mining Index had double digit returns (up 20.6% in PEN and 18.5% in USD).

Mexico’s main equity indices were generally flat, with the S&P/BMV IPC losing 0.7% for Q3. The exception was the S&P/BMV IRT MidCap, which gained 10.1% for the same period. Looking at the sector indices, the story of Chile and Peru repeats itself, with the mining sector in Mexico yielding the highest return, with the S&P/BMV Materials Select Sector Index gaining 17.3%. Among other industries, FIBRAs in Mexico had a strong third quarter, with returns of 5.9%. As was the case in Brazil with the S&P/B3 Ingenius Index, the S&P/BMV Ingenius Index gained 12.0% for the quarter and 56.6% YTD.

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U.S. Equities Market Attributes September 2020

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Howard Silverblatt

Senior Index Analyst, Product Management

KEY HIGHLIGHTS

MARKET SNAPSHOT

The champagne continued to be popped, as the month opened with two consecutive days of new closing highs (3,580.84; 22 YTD). However, what goes up, must come down, and what goes up too fast eventually brings smiles to short sellers and agita to the market.

Aiding the market’s decline was the growing concern over a pullback in openings (due to higher COVID rates), re-closings and restrictions (especially in Europe), and chaotic U.S. school openings, as many areas appeared to be ill prepared (even though it had been planned for months), as “kids will be kids” (especially on the higher education level) spread the virus. Starting to add to the market concern is the upcoming presidential election on Nov. 3, 2020. Typically, more trading positions (reallocations) would be taken by now, but the uncertainty of the outcome, which includes when we will know who won, has produced paper portfolios, but limited trading action. Even the first presidential debate (with two more planned for Oct. 15 and 22, 2020) and a fight over filling the vacant Supreme Court position failed to bring out significant confirmed trades. It’s expected that the impact will increase significantly in October (don’t even want to think about November yet), and the view of the outcome will drive trades.


U.S. Equities Market Attributes August 2020

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Howard Silverblatt

Senior Index Analyst, Product Management

KEY HIGHLIGHTS

MARKET SNAPSHOT

It wasn’t a perfect month, but with the S&P 500’s 7.01% gain, some may label it as such given it was the best August since 1986’s 7.12%. However, the last week of the month (up 3.64%) was a perfect week—five consecutive days of new closing highs (3,508.01; an event not seen since Oct. 16-20, 2017, and March 16-20, 1998, before that), and a new intraday high (3,514.77, set on the last day of the month). On the way to these highs, the index passed (and closed above) the 3,400 and 3,500 levels for the first time. Year-to-date, it posted 20 new closing highs, and it has posted 144 since the U.S. November 2016 election, with 64 days left until the next election date. The impressive run up since the March 23, 2020, low (56.45%, 176% annualized) has astonished professional money managers, as they seek to justify the optimism that has the index selling at a 21.3 P/E based on 2021 earnings (a value that would be considered high, if it were based on the current 12-month earnings, much less discounted 16 months into the future). What gives with the current version of “irrational exuberance” is the market’s optimism over COVID-19, that it will be tamed, if not cured (treatment if not a cure, easy and inexpensive testing, and moving it out of the death column and into a bad two weeks penalty box). I should note that when the Maestro used that term on Dec. 5, 1996, the index was up 21.0% YTD and selling at a trailing 12-month P/E of 18, compared with 28 today; of course, the index did go up another 105% until the March 24, 2000, high (from 745 to 1,527).


U.S. Equities Market Attributes July 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. reached 77,000, a record level, as over 4.6 million people in the U.S. were infected (17.5 million globally), with over 153,000 deaths (677,000).

The first month of earnings season started slowly, but picked up, as 62% of S&P 500 issues, representing 75% of the index value, reported.  Companies took a little longer to review the COVID-19 situation and then decide what they wanted to tell the world (shareholders, competitors, and customers).  The reported earnings results had 82.1% of the issues beating their estimates, which had been lowered by 47.9% (always nice to ensure a beat), as earnings continued to get front-page news but didn’t get the front-page headline.  The U.S. Congress was in the public eye, but still was not the front-page headline, as the group returned after a break to battle COVID-19, not via the medical lab, but via negotiations to pass another (Phase Four) COVID-19-related aid package.  The Senate (Republicans) unveiled their USD 1 trillion bill, which will now be negotiated with the USD 3.5 trillion bill from the House (Democrats).  The key to the package appears to be an extension (potentially with changes) of the expired Federal Pandemic Unemployment Compensation, which gave an additional weekly unemployment benefit of USD 600 (the House bill brings it back to January 2021, the Senate cuts it to USD 200 until September 2020, then uses a formula based on wages with a cap after that), as well as direct aid to states (the House has USD 1 trillion for states and schools, the Senate has USD 105 billion for schools and no new aid for states).


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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