Indexology^® Blog

Latin American equities had a rough Q3 2021, as the S&P Latin America BMI fell 14.7% in USD terms, driven by a steep drop in Brazilian equities and the U.S. dollar strengthening against local currencies. This weak result offset sizable gains from earlier in 2021, leaving the regional benchmark with a 7% loss YTD. However, on a 12-month horizon, the S&P Latin America BMI remained up 25.4%, outperforming the S&P Emerging BMI by about 5%.

While recent political uncertainty and civil unrest in the region have contributed to these results, on a global perspective, events abroad also have had an impact on equities, with emerging markets being the most affected. The S&P 500® ended the quarter nearly flat, up 0.6%, after reaching new records during late August and early September. Uncertainty over China’s Evergrande Group’s debt negotiations also had a negative effect on global markets; the S&P/BMV China SX20 lost 15.7% and the S&P Emerging BMI decreased 6.2% during Q3.

However, at a country level, results were mixed. The countries that performed the best during Q3 were Argentina, Colombia, and Mexico, which had positive returns in local currency as demonstrated by the S&P MERVAL Index (24.0%), the S&P Colombia Select Index (8.7%), and the S&P/BMV IRT (2.8%), respectively. The case of Argentina is particularly noteworthy, with the S&P MERVAL Index posting solid returns of 51.0% in local currency and 28.7% in U.S. dollar terms YTD, making it an outlier in the region. On the flip side, the S&P Brazil BMI and the S&P/BVL Peru Select 20% Capped Index were the underperformers of the group in Q3, down 13.9% and 4.9%, respectively. Chile’s S&P IPSA was nearly flat for the quarter.

All sectors across the S&P Latin America BMI posted negative returns in Q3. Procyclical sectors, such as Consumer Discretionary, Information Technology, and Materials, were the most affected, losing 32.6%, 28.2%, and 21.4%, respectively. Defensive sectors, such as Real Estate and Utilities, had better relative performance, losing only 12.7% and 7.8%, respectively. Lastly, the sole bright spot during the quarter from the sector perspective was Communication Services, which ended nearly flat.

Spotlight: Factor Indices in Brazil and Mexico

In times of high volatility, it is interesting to see how different factor indices perform under current market conditions. Perhaps unsurprisingly, we saw that in Brazil and Mexico, value, low volatility, and risk-weighted indices performed best in Q3, as lower volatility and value-oriented companies were in favor in a generally risk-off environment. In Q3, the S&P/BMV IPC CompMx Enhanced Value Index gained 2.3% in MXN, while the S&P/B3 Enhanced Value Index returned -1.9% in BRL.

Shifting focus to the longer term, we see that the majority of factor indices outperformed the broader market over the past 10 years, illustrating the benefits of using a non-market-cap-weighted indexing approach.

As the end of the year approaches, many risks are still clouding equity markets in Latin America. The continued spread of COVID-19 variants continues despite increased vaccination rates. Important local elections that will shape the new policies of several countries in the region are also slated to occur. Stay tuned for what promises to be an exciting year end in the region.

For more information on how Latin American benchmarks performed in Q3 2021, read our latest Latin America Scorecard.

Global equities retreated, declining 1% during Q3 2021, as measured by the S&P Global BMI. Shariah-compliant benchmarks, including the S&P Global BMI Shariah and Dow Jones Islamic Market (DJIM) World Index, declined similarly, each losing 0.8% during the period.

While the quarterly figures narrowly favored the Islamic indices, their YTD performance lagged, in part due to strength in the Financials sector. All major regional conventional benchmarks returned positive performance YTD, while the Shariah-compliant DJIM World Emerging Markets Index and DJIM Asia/Pacific Index declined.

Strength in Financials Sector Drives Underperformance of Shariah Indices YTD

While global equities enjoyed broad gains YTD, sector drivers helped explain a majority of the underperformance of Shariah benchmarks. Financials—which is nearly absent from Islamic indices—gained 21.1% YTD, explaining a majority of the performance differential, while weights in Energy and Health Care also played a role in the relative underperformance.

Exhibit 2 displays the sector returns along with the effect of over- and underweight sector allocations, as well as the impact of specific stock exclusions from the S&P Global BMI Shariah compared to its conventional counterpart. Strong gains of stocks within the Communication Services sector—which contains Alphabet and Facebook—helped offset some of the sector-driven underperformance.

MENA Equities Continued to Gain YTD

MENA regional equities gained considerably YTD, as the S&P Pan Arab Composite advanced 31.0%. The S&P Saudi Arabia BMI led the way in the region, gaining 37.5%, followed by the S&P United Arab Emirates BMI, up 35.9%. The S&P Bahrain BMI led the way in the region in Q3, gaining 10.9%, followed by the S&P Kuwait BMI, which gained 7.9%. All MENA country indices remained positive YTD, except for the S&P Egypt BMI, which was down just 0.4% YTD.

For more information on how Shariah-compliant benchmarks performed in Q3 2021, read our latest Shariah Scorecard.

This article was first published in IFN Volume 18 Issue 41 dated the 13^th October 2021

As Asian investors consider potential shifts in inflation and macro trends, could a closer look at U.S. markets through the lens of the S&P 500 help them identify potential opportunities abroad? Hamish Preston and Jason Ye of S&P DJI join Erik Norland of CME Group to explore the potential risk/return and diversification benefits of U.S. equities.

Introduced in April 2017, the S&P/TSX Capped REIT Income Index is designed to serve as an income-producing Canadian REIT strategy by overweighting REITs with higher risk-adjusted income distribution yields. The Canadian REIT sector experienced a boom prior to the onset of the pandemic as the index peaked¹ on Feb. 20, 2020, its then-highest value since its inception. The index gained 86.67%² since its bottom on March 23, 2020, attaining an all-time high on Sept. 8, 2021. In this post, we will take a closer look at the performance characteristics of the index since our last review.

Exhibit 1 shows that the S&P/TSX Capped REIT Income Index generated higher total returns than its benchmark, the S&P/TSX Composite, over the period studied. However, due to higher volatility, its performance was similar on a risk-adjusted basis. Historically, the S&P/TSX Capped REIT Income Index exhibited higher best monthly returns, average monthly returns, and maximum rolling 12-month returns compared with the benchmark.

Exhibit 2 shows that the index outperformed the benchmark 75% of the time in down markets³ and underperformed the benchmark 55% of the time in up markets. However, the magnitude of outperformance in down markets was pronounced, generating a monthly average excess return of 1.29% over the benchmark. Thus the strategy exhibited downside protection characteristics despite experiencing greater volatility.

Exhibit 3 shows the calendar year performance of the S&P/TSX Capped REIT Income Index versus the benchmark. We can see that the strategy outperformed the underlying broad market in 10 out of 16 years.

Higher Yield Than the Broad Market

From December 2006 to September 2021, the S&P/TSX Capped REIT Income Index generated an average historical dividend yield of 6.1%, compared with 2.8% for the benchmark.

Current Composition

As of close of Sept. 30, 2021, the index had 19 constituents, and the maximum weight of any security was 10.6%. Retail REITs topped the list at 33% of the index, followed by Residential REITs at 26% (see Exhibit 6).

Conclusion

Canadian REITs were particularly hard hit during the pandemic, but have recovered steadily, recently reaching a new high on Sept. 8, 2021. The index offers a differentiated high yield REIT exposure in a low yield environment, while also providing exposure to the growth of the REIT sector. Over the long term, REITs have outperformed the broader equity market in Canada on an absolute basis, while providing downside protection during down markets.

¹ Index values measured on a TR basis.

² From March 23, 2020, to Sept. 30, 2021.

³ Down market: When S&P TSX Composite index has negative monthly return. Up market: When S&P TSX Composite index has positive monthly return

In a blog post from earlier this year, I outlined comparisons between Bitcoin and gold. In this post, we’ll look at how the underlying investment theses for each asset have rapidly evolved this year. Prior to 2021, some market participants viewed Bitcoin as a form of digital gold, sharing many of the same use cases, such as being a store of value. Others viewed Bitcoin as a mechanism for exchange or a technological platform. Today, cryptocurrencies have crossed the chasm into the mainstream investment universe and are starting to compete with gold and other asset classes for a slice of the investment portfolio. Correlation turned negative this year as cryptocurrency volatility exploded while gold eased.

During the recent multi-month period of price consolidation for the largest market cap cryptocurrencies, the store of value thesis for holding cryptocurrencies seemed to be gaining prominence. Gary Gensler, the SEC chairman, said, “Bitcoin…is a highly speculative asset, but it is a store of value that people wish to invest in as some would invest in gold.”¹ Institutional adoption continues at pace, albeit within a difficult regulatory environment, adding to the stable demand story needed in order for an asset to be considered a reliable store of value. Transparency increased in 2021 as S&P DJI launched its first cryptocurrency indices.

Concerns about inflation eroding purchasing power have led market participants toward liquid, scarce assets, which tend to hold value over time. Recent performance shows cryptocurrencies performed stronger than all other commonly considered stores of value, albeit with much higher volatility. Volatility may still be high for cryptocurrencies as they adjust to the competing forces of potential regulation news from governments and continued widespread adoption.

Recent debt ceiling discussions in the U.S. opened up the possibility, however small, of default by the country with the widely accepted risk-free rate of return (i.e., U.S. treasury yield). A decade of quantitative easing has arguably devalued assets, including the U.S. dollar. Where can market participants park wealth that won’t lose value over time? Gold, real estate, inflation-protected securities, or alternative assets such as art were the typical answers, but as people become more and more educated on cryptocurrencies, it seems reasonable to assume that they will join the list of assets used as a store of value. According to Fidelity’s latest Institutional Investor Digital Assets Study,² 52% of investors surveyed globally between December 2020 and April 2021 have an investment in digital assets. Asian investors were the most accepting of digital assets, with more than 70% holding exposure.

Alternative investments are becoming increasingly popular as investors look outside the traditional equity and fixed income markets for assets that can provide a good store of value as well as diversification benefits. Inflated asset and real estate prices are driving a closer examination of places to store wealth that will hold value over time. Cryptocurrencies may be viewed as the higher beta store of value as this new asset class coalesces and it could one day be considered a normal allocation to a standard portfolio, similar to gold.

¹ Gary Gensler U.S. SEC Chairman, Oct. 6 2021, House Financial Services Committee oversight hearing.

² Fidelity Digital Assets, September 2021, The Institutional Investor Digital Assets Study.