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Taking a tactical approach to a new investment era

U.S. Equities Market Attributes May 2021

S&P Kensho New Economies Commentary: Q1 2021

One Small Step for Small (and Mid) Caps, One Large Step for Sustainability: A Recap of the 2021 S&P MidCap 400 ESG Index and S&P SmallCap 600 ESG Index Rebalance Results

U.S. Equities Market Attributes April 2021

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 May 2021

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Howard Silverblatt

Senior Index Analyst, Product Management

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.

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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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One Small Step for Small (and Mid) Caps, One Large Step for Sustainability: A Recap of the 2021 S&P MidCap 400 ESG Index and S&P SmallCap 600 ESG Index Rebalance Results

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Margaret Dorn

Senior Director, ESG Client Engagement North America

In the world of ESG investing, there has long existed a David versus Goliath scenario in which small-and mid-cap companies have often been considered the sustainable underdog.  With the strength, size, and resources of larger-cap companies, it may seem a formidable challenge for smaller companies to compete within the sustainable ranks.  However, the rules around corporate sustainability are evolving, and nimbleness, flexibility, and adaptability are all attributes that will ultimately help promote positive change in mid- and small-cap companies.  The 2021 rebalance—the first for the S&P MidCap 400® ESG Index and the S&P SmallCap 600® ESG Index since their launch—has provided an opportunity for these small(er), yet mighty, companies to showcase their contributions to the growing sustainability universe.

ESG Score Improvement: A Leading Indicator

While there were many positive results coming out of the April 30, 2021, rebalance, one of the most encouraging signals was that small and mid caps are well on their way to improving their sustainability standing. This was evidenced by the fact that the S&P SmallCap 600 ESG Index and S&P MidCap 400 ESG Index achieved a significant boost in S&P DJI ESG Score improvement both in absolute terms—at the index level—and in their realized ESG score potential. While the numbers may seem modest in comparison to their large-cap counterpart, the substantial year-over-year increase in ESG performance for both the small- and mid-cap indices dwarfed the improvements exhibited by the S&P 500® ESG Index (see Exhibit 1).  This could be considered an indicator that smaller companies are moving quickly to close the sustainability gap between themselves and their larger-cap competitors.

Contributors:

Maggie Dorn, Senior Director, ESG Client Engagement, North America, margaret.dorn@spglobal.com

S&P Dow Jones Indices’ Market Attributes® series provides market commentary highlighting developments across various asset classes.

A Recap of the 2021 S&P MidCap 400 ESG Index and S&P SmallCap 600 ESG Index Rebalance - Exhibit 1

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U.S. Equities Market Attributes April 2021

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Howard Silverblatt

Senior Index Analyst, Product Management

KEY HIGHLIGHTS

U.S. Equities Market Attributes April 2021

MARKET SNAPSHOT

The good times continued, and will until they don't. The new highs appeared faster than leaves falling in an early winter's frost, with profits blooming higher than dandelions after a spring rain. The gardening continued to be vigilantly overseen by the Fed & Treasury (the U.S. Federal Reserve, which still is not talking about talking about tapering, and the U.S. Treasury, which if you didn't like the last spending program, look at the two current proposals, or just wait a bit), as economic growth was measured against charts of actual stimulus checks and vaccine rates. Adding fertilizer to the garden were well-off consumers, who started what is expected to be a record-breaking spending spree, as they come out (safe or not) to resume their pre-pandemic lives. The impact of the wallet opening was seen in the first quarter earnings report, not by the 84% beat rate (249 of 297; 67% historically), but the size of the beat, as the first quarter was on track to set a new record (up 135% over the depressed Q1 2020 period) with the new high that wasn't expected until the second quarter. Those earnings records, with new ones expected for Q3 and Q4 2021 (Q2 is expected to be a tick down, and second only to Q1), fed the already optimistic market, as the S&P 500 set another 10 new closing highs for the month (of the 21 trading days; 25 new highs YTD). The bottom line was that the index returned 11.32% YTD (37.94% annualized), with some investors taking a little of f the top (and some reallocating to more liquid stocks), but few getting out of the market (less selling, and trading was down). With even more stimulus being discussed (via the American Infrastructure and Family Plans) and consumers charging on, upward pressure will likely continue. As for what could get in the way of the upward pressure, since even a pause in the Johnson & Johnson vaccine didn't impact the optimism, the current candidates are: COVID-21 (or the equivalent), a strong whiff of inflation (helped by overspending, cost push, and supply and labor shortages), higher debt cost (think national debt, not corporate), a resistance to higher price pass-throughs (lowering margins, which at 12.81% for Q1 could set an Operating record), a non-U.S. downturn (e.g., Europe and Asia, even as China is booming), the start of profit-taking with too many money managers jumping on the bandwagon to protect their gains, and a reliable old favorite— Washington.

The S&P 500 closed at 4,181.17, up 5.24% (5.34% with dividends) from March's 3,972.89 close. The Dow® broke through 34,000 for the first time, as it closed at 33,874.85, up 2.71% (2.78% with dividends).

The U.S. Senate Parliamentarian ruled that President Biden's USD 2.25 billion stimulus fiscal package is part of the of the previously passed budget resolution, which means a new budget does not need to be created, saving time and going directly to the reconciliation (political) process. In the background is an attempt by Democrats to change the filibuster rule, which would reduce the ability of Republicans to block legislation.

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