Indexology^® Blog

While most dividend strategies underperformed their respective benchmarks in 2023, the S&P Pan Asia Dividend Aristocrats^® impressively outperformed the S&P Pan Asia BMI by approximately 3.50% (see Exhibit 1). Furthermore, despite the outperformance, the S&P Pan Asia Dividend Aristocrats’ valuations and dividend yield remained favorable relative to the benchmark (see Exhibits 3 and 4). This blog will examine these metrics in more detail, in addition to providing a detailed performance attribution for 2023.

As Exhibit 1 shows, the S&P Pan Asia Dividend Aristocrats’ strong 2023 performance further boosted its long-term outperformance versus the S&P Pan Asia BMI. Going back to Dec. 31, 2001, the S&P Pan Asia Dividend Aristocrats has outperformed the S&P Pan Asia BMI on average by 2.35% annually. Additionally, this long-term outperformance has been achieved while also delivering a lower full-period volatility, maximum drawdown and downside capture ratio.

Exhibit 2 displays the 2023 performance attribution for the S&P Pan Asia Dividend Aristocrats and S&P Pan Asia BMI. As shown in the attribution analysis columns, the total outperformance totaled 3.50%, with 7.15% due to the bottom-up stock selection effect and -3.65% from the allocation or sector effect. Information Technology was the largest positive-contributing sector for the S&P Pan Asia Dividend Aristocrats, at 10.20%, with 10.78% from the selection effect and -0.58% due to the allocation effect.

The key differentiator of the S&P Pan Asia Dividend Aristocrats versus its benchmark is the requirement that stocks must increase dividends per share for at least seven consecutive years. This filter, in addition to the payout and dividend yield filter, may bias the index toward selecting higher quality stocks since the ability to consistently grow dividends over the long term can be an indication of financial strength and discipline.

Exhibit 3 displays the valuation comparison and discount of the S&P Pan Asia Dividend Aristocrats versus its benchmark. The index is cheaper on all three metrics shown, with an average discount over the three metrics at approximately 34%. Not shown in the table but important nonetheless, is the return-on-equity (ROE) metric, which measures how efficiently a company utilizes shareholder capital to generate net income. The S&P Pan Asia Dividend Aristocrats has a 9.9% ROE versus 9.1% for the S&P Pan Asia BMI as of Dec. 29, 2023.

As Exhibit 4 shows, the index’s dividend yield has been higher than the Pan Asia BMI’s dividend yield every year since 2009. Furthermore, the average dividend yield for the S&P Pan Asia Dividend Aristocrats was 3.42% versus 2.47% for the S&P Pan Asia BMI over this period. Interestingly, the year-end 2023 dividend yield for the S&P Pan Asia Dividend Aristocrats was 3.71%, 8.40% higher than its historical average versus the S&P Pan Asia BMI’s year-end 2023 dividend yield of 2.57%, only 4% higher than its historical average.

Conclusion

Following a strong year of performance in 2023 thanks to its effective bottom-up stock selection, the S&P Pan Asia Dividend Aristocrats heads into 2024 holding a dividend yield and valuation advantage over its benchmark. For investors seeking an index with these value and dividend yield exposures, in addition to various quality and dividend filters, the S&P Pan Asia Dividend Aristocrats Index is an option to consider.

Global equities witnessed a strong Q4 2023 as slowing inflation and the potential for lower interest rates improved market sentiment drastically. The S&P Global BMI rallied 11.4% for the quarter, finishing the year with an impressive 21.9% return. Middle East and North Africa (MENA) equities rose 6.4% in Q4, as measured by the S&P Pan Arab Composite, adding to a 10.1% total return for the year. Gulf Cooperation Council (GCC) countries largely posted gains, led by Bahrain (23.4%) and Saudi Arabia (15.0%), while Kuwait was an exception, with a 6.3% loss.

Shariah-compliant benchmarks, including the S&P Global BMI Shariah and Dow Jones Islamic Market (DJIM) World Index, beat their conventional counterparts by about 0.5% during the quarter, extending their outperformance to over 5% for the year and 19.7% cumulative over the past five years. Largely driven by its outperformance in the U.S., the benchmark DJIM Developed Markets Index stood out for relative performance against the conventional benchmark in 2023. The DJIM World Emerging Markets Index was a laggard, trailing behind the conventional benchmark as well as the developed market counterpart (see Exhibit 1).

Drivers of Shariah Index Performance in 2023

The outperformance of Shariah benchmarks against their conventional counterparts often comes into focus through the lens of sectors. Across global stock markets overall, a higher exposure to Information Technology stocks within Islamic indices, no exposure to conventional Financials (including banks) and less exposure to highly indebted companies (such as utilities) were the major drivers of the performance variance last year.

The Information Technology sector’s 53% gain played a major part in 2023, contributing to more than half of the S&P Global BMI Shariah’s total return. Energy, Utilities and Consumer Staples were the only sectors with losses for the year, while their impact was limited given their small representation in the index (see Exhibit 2). 

Global Sukuk Turned Around in Q4 2023

The global sukuk market also had a solid quarter with a gain of 4.5%, as measured by the Dow Jones Sukuk Index (ex-Reinvestment). The benchmark ended the year with a 5.5% return, falling slightly short of the 5.7% annual return of the iBoxx USD Overall, a global USD-denominated investment grade bond benchmark. The regional MENA and GCC Bond & Sukuk benchmarks gained 5.2%.

This article was first published in IFN Volume 21 Issue 3 dated Jan. 17, 2024.

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There are potential diversification benefits for Asian investors who incorporate U.S. equities to alleviate their tendency for a home country bias. Representing nearly 60% of the global equity market, as measured by the S&P Global BMI, U.S. equities provide a larger opportunity set outside of Asia, along with potential diversification due to different economic structures and cycles between markets, coupled with differing sector exposures. The S&P 500^®, widely regarded as the best single benchmark of large-cap U.S. equities, has an estimated USD 5.7 trillion in assets tracking¹ the index and a robust trading ecosystem. Market participants can consider using S&P 500 index-linked products to efficiently trade U.S. equities.

2023 demonstrates the impact of U.S. equity exposure for Asian investors. A slower-than-expected economic recovery in China with a continued property market downturn and ongoing U.S.-China tensions weighed on market sentiment and performance, making China and Hong Kong among the relative underperformers with their S&P BMI market indices losing 10% and 15%, respectively (see Exhibit 1). However, equity markets remained resilient in other parts of the world that had stronger economic backdrops. Easing inflation and the potential for lower interest rates led to a sharp market rally in the fourth quarter, with the S&P Global BMI closing the year with a solid 22% total return in USD. The U.S. was a standout performer, with the S&P 500 posting a 26% total return in 2023, more than offsetting its loss of 18% in 2022.

Reversals were also seen at a sector level. Information Technology was the best-performing sector, with an impressive 58% gain in 2023 following a 28% loss in 2022; the sector contributed over 50% of the S&P 500’s return in 2023. Communication Services and Consumer Discretionary also posted strong gains of 56% and 42%, respectively, after steep losses of 40% and 37% in 2022, respectively. Utilities and Energy were the only sectors that closed the year in the red after positive returns in 2022 (see Exhibit 2).

At a stock level, the contribution to the market return from a few select stocks was unusually high in 2023. The so-called “Magnificent Seven,” namely Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia and Tesla, surged 112% on average over the year, contributing 58% of the S&P 500’s return. Nvidia was the best performer among them, with a 239% gain, and became the 4^th-largest stock in the index (up from the 10^th position in the beginning of the year). This rally in mega caps resulted in the largest underperformance of the S&P 500 Equal Weight Index² versus the S&P 500 (-12%) since the equal-weight index’s inception in 2003 (see Exhibit 3). With the Magnificent Seven rising 4% on average versus the S&P 500’s 1% (as of Jan. 19, 2024), the relative performance of mega caps continues to be observed as we enter 2024.

¹ Data as of Dec. 31, 2022, based on S&P Dow Jones Indices’ Annual Survey of Indexed Assets.

² The S&P 500 Equal Weight Index (EWI) is the equal-weight version of the S&P 500. The index includes the same constituents as the capitalization-weighted S&P 500, but each company in the S&P 500 EWI is allocated a fixed weight—or 0.2% of the index total at each quarterly rebalance. See here more information about this index.

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