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Defensive Strategies for the Asian USD High Yield Credit Market

TalkingPoints: Finding Resilience amid Uncertainty: A Low Volatility High Dividend Approach for the A-Share Market

From Countryside to Capital Markets: The S&P/ASX Agribusiness Index

Global Sector Primer Series: Financials

InsuranceTalks: An Enhanced Approach to Managing Risk

Defensive Strategies for the Asian USD High Yield Credit Market

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Kangwei Yang

Director, Fixed Income Product Management

S&P Dow Jones Indices

Market Overview (2021-Present)

International investors have long viewed the Asian USD high yield credit bond market as an alternative investment universe to the traditional U.S. high yield market. As a result, the junk bond market has undergone considerable growth, with the total issuance increasing almost sixfold between 2012 and 2020.

However, the market has seen some turbulence in the past 12 to 18 months, largely due to its high exposure to the Chinese real estate market. In the past decade, Chinese real estate companies have issued large amounts of debt at a low borrowing cost to fund their operations. This changed when Chinese regulators imposed new rules to deleverage the financial system. Meanwhile, companies were unable to turn over their inventory effectively for cash, and a liquidity crisis in the sector began to emerge.

In September 2021, China Evergrande Group, the second-largest property developer in China by sales, missed coupon payments on its U.S. debt obligation. Since then, there has been a growing list of prominent names involved in the Chinese real estate sector crisis. The top five issuers by market value as of April 2021 in the iBoxx USD Asia ex-Japan China High Yield Real Estate2 have defaulted on their USD debt obligations in the past 12 months.

As of May 31, 2022, more than 12 distinct Chinese property issuers in the iBoxx USD Asia ex-Japan Corporates High Yield had missed payments on their U.S. debt, and the total amount of issuance removed from the index exceeded USD 35 billion.

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TalkingPoints: Finding Resilience amid Uncertainty: A Low Volatility High Dividend Approach for the A-Share Market

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Izzy Wang

Analyst, Strategy Indices

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Jason Ye

Director, Strategy Indices

The S&P China A-Share LargeCap Low Volatility High Dividend 50 Index is designed to offer liquid and tradable exposure to dividends  and low volatility, two well-known risk factors that have delivered risk premium in the China A-share market in the past.

The two factors are combined through sequential dividend and low  volatility screens. Companies exhibiting high dividend yield may fall in a “dividend trap,” since high dividend yield can be caused by decreasing stock prices rather than increasing dividend payments. Overlaying a low volatility screen on a high dividend portfolio may help to eliminate the dividend trap, resulting in improved absolute and risk-adjusted returns.

Over the 10-year back-tested period, the index has shown robust return, lower risk, reduced drawdown, and cheaper valuation than its benchmark. The index may be appealing to those who wish to maintain equity exposure but limit risk or those who are interested  in increasing equity exposure without increasing risk.

Uncertainty has been a common theme throughout 2019 and rolling into 2020, with escalated risk of Covid-19. The S&P China A-Share LargeCap Low Volatility High Dividend 50 Index may help to provide an alternative for investors to ride through this challenging period.

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From Countryside to Capital Markets: The S&P/ASX Agribusiness Index

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Izzy Wang

Analyst, Strategy Indices

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Jason Ye

Director, Strategy Indices

Introduction

Agriculture is the foundation of our society.  It provides food to support human’s daily nutrition needs and is the main source of raw materials such as cotton, wood and leather that are critical to major industries in the economy.  The United Nations (UN) has set “end hunger, achieve food security and improved nutrition and promote sustainable agriculture” as a global policy in its Sustainable Development Goals. By 2050, the global population is estimated to grow to 9.6 billion, demanding at least a 70% increase in food supply. While the growing population is driving demand for agricultural products, climate change, geopolitical risk and water scarcity are threatening the global food supply chain.  Most recently, the Russia-Ukraine conflict has cast immediate damage to global food supply, causing a food price increase in 2022. Since 2020, the World Bank Agriculture Price Index has increased by 52% (see Exhibit 1).

From Countryside to Capital Markets: The S&P/ASX Agribusiness Index: Exhibit 1

Australia is a major producer of many agricultural products, including wheat, wool and beef.  Its agribusiness is a vital contributor to the domestic economy, and Australia itself is a key export country in the global market.  The diversified climate and soil conditions in Australia can sustain a wide range of agricultural businesses including livestock, crops, fruit and vegetables, fisheries, and forest (see Exhibit 2).  More than half of the land and about one-quarter of the water in Australia are used in the agriculture industry. Of the agricultural production, 70% is exported to other countries, accounting for 12% of Australia’s export earnings in 2020-2021. In 2020, Australia’s sheep meat export ranked first, and its beef export ranked second in the world.

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Global Sector Primer Series: Financials

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Hector Huitzil Granados

Analyst, Global Equity Indices

Introduction

The Global Industry Classification Standard® (GICS®) assigns companies to a single classification at the sub-industry level according to their principal business activity using quantitative and qualitative factors, including revenues, earnings and market perception.  The sector is the first level of the four-tiered, hierarchical industry classification system that includes 11 sectors, 24 industry groups, 69 industries and 158 sub-industries.  The classification standard is in constant evolution to ensure that it reflects the current state of industries globally.

The Financials sector includes, but is not limited to:

  • Companies with conventional banking operations;
  • Insurance and reinsurance brokerage firms;
  • Financial exchanges and providers of financial decision support tools and products, including rating agencies;
  • Institutions that provide consumer finance services;
  • Investment management and brokerage firms;
  • Firms providing mortgage and mortgage-related services; and
  • Companies with significantly diversified holdings across three or more sectors, none of which contribute a majority of profit or sales.

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InsuranceTalks: An Enhanced Approach to Managing Risk

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Phillip Brzenk

Managing Director, Global Head of Multi-Asset Indices

Insurance Talks is an interview series where insurance industry thinkers share their thoughts and perspectives on a variety of market trends and themes impacting indexing.

Phillip Brzenk is Head of Multi-Asset Indices at S&P Dow Jones Indices (S&P DJI). His team is responsible for the product management of multi-asset and option indices, which cover a variety of outcome-oriented index solutions including managed volatility, retirement, dynamic allocation, inflation hedging, sustainability, and absolute return.

S&P DJI: Following the 2008 Global Financial Crisis (GFC), many investors with longer-term time horizons and liabilities found themselves more averse to volatility. How did this give rise to the S&P Risk Control Indices?

Phil: The GFC brought significant disruption to the markets, with U.S. equities (as measured by the total return of the S&P 500®) dropping over 55% from Oct. 9, 2007, to March 9, 2009. In addition, correlations between asset classes increased, reducing potential diversification benefits normally associated with standard allocation strategies. Coming out of the crisis, there was a clear need to develop a systematic asset allocation framework that could react quickly to changing market conditions, with a particular focus on controlling volatility—and with that, S&P DJI was a pioneer in the market when we launched the first  S&P Risk Control Indices in 2009.

S&P DJI: Some practitioners might ask, why manage risk when it can be avoided?

Phil: The S&P Risk Control Indices attempt to give asset class exposure to equities and cash (Risk Control 1 [RC]) or equities and Treasury bonds (Risk Control 2 [RC2]) for potential long-term return premium over short-term cash. The index series incorporates a reactionary asset allocation framework that shifts between the asset classes in order to target a specific volatility target percentage. While volatility is not precisely equivalent to risk, having a volatility target enables participants to match their appetite for risk taking. The asset allocation framework and volatility target in S&P DJI’s risk control indices have historically enabled them to achieve reduced tail risk and higher risk-adjusted returns compared to standard equity exposure.

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