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S&P Kensho New Economies Commentary: Q4 2021

S&P Latin America Equity Indices Quantitative Analysis Q4 2021

U.S. Equities Market Attributes December 2021

ETF Transactions by U.S. Insurers in Q3 2021

U.S. Equities Market Attributes November 2021

S&P Kensho New Economies Commentary: Q4 2021

TOP THREE FROM ACROSS THE NEW ECONOMIES

Virtual Reality (10.8%):Facebook started a global metaverse fever by rebranding and shifting financial focus to Meta in late October 2021. In essence, a metaverse encompasses a network of 3D virtual spaces, often accessed through virtual reality or augmented reality. Riding this wave, virtual reality rose to the best-performing subsector in Q4 2021. Chipmakers benefited from the accelerated demand for semiconductor chips, becoming the key performance driver for the virtual reality subsector. Shares of Synaptics Inc. soared, with strong consecutive quarterly revenue growth, thanks to its successful business shift from smartphone chips to the Internet of Things (IoT). Himax Technologies, a leading display driver maker, posted impressive Q4 revenue and earnings. Investors have piled into Nvidia to take advantage of various technology trends such as video gaming, self-driving cars, and the metaverse.

Autonomous Vehicles (8.2%):While supply chain issues brought on by COVID-19 remain, electric car manufacturers achieved an impressive number of car deliveries. XPeng, Ford, and Tesla all delivered a strong performance, posting nearly a triple-digit year-over-year growth in deliveries this quarter. Semiconductor suppliers, such as On Semiconductor, Nvidia, and Ambarella were also among the top contributors, thanks to their vital position in various technology trends.

Cyber Security (8.0%):Tailwinds from the ongoing digital transformation, increased focus on online security, and remote work continued to support the demand for next generation security. The draw of metaverse has ignited the investors' appetite for network stocks. Limelight Networks, Broadcom, and Juniper Networks were the top three contributors this quarter. Despite disappointing numbers across the previous five quarters, Limelight Networks attracted much interest over strong viewership in the media streaming sector. Broadcom announced better-than-expected fiscal Q4 results, with the approval of a USD 10 billion stock buyback plan. Juniper Networks is well positioned as a leading provider of networking solutions.

BOTTOM THREE FROM ACROSS THE NEW ECONOMIES

Digital Communities (-14.9%):With the gradual reopening of the global economy and growing supply chain issues, Digital Communities posted a poor performance in Q4. The biggest contributor to this underperformance was iQIYI. In addition to the pressure from China's tightening of the regulatory environment for tech companies, iQIYI's advertising revenue along with its number of subscribers declined over the past three consecutive quarters; its stock price dropped by 43% in Q4. Snap dropped 36% due to its disappointing earnings report, as well as its new user privacy protection initiative that prevents third parties from collecting user data for advertisement targeting. Another notable underperformance was Vimeo, whose forward guidance for 2022 was below the market's expectations.

Alternative Finance (-16.6%):Cryptocurrency Q4 performance was volatile, with lackluster net gains. In October, Robinhood's reported revenue declined by 35% since the prior quarter, dragged lower by the slowdown in crypto trading. Its stock price crashed by 58%. In an uncertain macroeconomic environment, investors have curtailed their expectations about financial lending services and payment systems, which saw Upstart Holdings and Paysafe to decline by nearly 50% in Q4.

Distributed Ledger (-16.6%):Along with cryptocurrencies, Distributed Ledger experienced a harsh winter in Q4. With the risk of persistently high inflation and potential Fed rate hikes in the background, as well as the constant battle between regulation and the market, companies like GreenBox, Ebang International, and OneConnect Financial Technology dropped between 40% and 50% in Q4. The biggest underperformer, SOS Limited, was down by 61% due to its USD 90 million of new stock offerings in November, which presented a negative signal to the market.


S&P Latin America Equity Indices Quantitative Analysis Q4 2021

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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: Q4 2021

2021 started on a hopeful note, with COVID-19 vaccines coming to save the world. However, as in many other parts of the world, Latin American countries struggled to control the pandemic’s impact on their economies and societies. Additionally, political uncertainty and civil unrest in several countries contributed to a disappointing year.

While most global markets experienced strong performance in 2021, the S&P Latin America BMI finished the year down 12%, with negative returns in three out of four quarters. It is interesting to note, however, that Latin America excluding Brazil had a different outcome, as the S&P MILA Pacific Alliance Composite gained 6.7% for the year.

While headline indices from Argentina, Chile, Colombia, and Peru all closed 2021 in positive territory in local currencies, Mexico was the standout performer among Latin American countries as the S&P/BMV IRT gained 24.4% YTD. The story was different in U.S. dollar terms, as all markets except for Argentina and Mexico ended in the red due to local currency depreciation against the U.S. dollar.

Brazil was the worst performer in 2021 in both Brazilian reals and U.S. dollars. Most Brazilian sectors underperformed; Financials, represented by the S&P Brazil BMI Financials Index (-24.3%), had significant losses and the greatest impact on the entire market. Mexico, on the other hand, had the largest annual gain since 2009, as shown by the S&P/BMV IRT. Most of this was driven by the double-digit gains of some of the largest Mexican companies like America Movil, Cemex, and Walmart de Mexico.

In terms of regional sectors, nearly all of them struggled to stay afloat. In the end, for 2021, Communication Services (19.2% YTD), Consumer Staples (5.7% YTD), Energy (10% YTD), and Materials (3.1% YTD) were the only ones that accomplished that goal. The pandemic drove most people indoors to work, play, and shop. In Communication Services, companies like America Movil, Grupo Televisa, and Telefonica Brasil greatly benefited from increased subscribers to their online and pay TV services. Energy was driven up by solid annual price performances from Petrobras and Ecopetrol, which represented nearly 77% of the Energy sector. Consumer Staples, typically a reliable defensive sector, did not disappoint. Finally, Materials companies, which include producers of building materials, benefited from high demand for their products. Likewise, mining companies, particularly copper exporters, gained from historically high prices for their exports in 2021. On the downside, Financials, the largest sector in the region, was down 21.6% for the year. Brazilian financial institutions, representing 64% of the sector, had the most losses for the year, greatly contributing to the region’s disappointing returns.

As the COVID-19 pandemic continues to evolve, uncertainty envelops the region at the start of 2022. High inflation, weakness in local labor markets, expectations for rising interest rates, and political instability in several Latin American countries continue to weigh on equity market sentiment. All this points to what could be a significant shift in economic and governmental policies in 2022. For better or for worse, it promises to be another fascinating year.


U.S. Equities Market Attributes December 2021

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Howard Silverblatt

Senior Index Analyst, Product Management

KEY HIGHLIGHTS

U.S. Equities Market Attributes December 2021

MARKET SNAPSHOT

As for the year that was—it was, posting a broad 26.89% gain (28.71% with dividends), and 434 issues gained for the year, as 96 gained over 50% and 7 declined at least 25%.  All 11 sectors posted double-digit gains (7 gained last year, with 5 in the double digits).  COVID-19 continued to dominate the news, as the vaccines (and now the boosters) permitted Americans to spend more outside.  But it was spending inside, especially via e-commerce, that permitted record earnings, sales, and margins for the S&P 500, as consumer wealth shot up (via equities and home ownership, as well as lower spending), and confinement seemed to boost spending.

Also supporting the economy was a friendly Fed, which kept rates near zero.  While bond buying support is expected to end in March 2022, and rates are likely to rise (first increase potentially in June 2022), even with three increases (of 0.25% each), rates would remain low and therefore supportive.  Inflation, however, may be a different issue.  While the supply shortage is expected to ease, labor shortages (or “displacements”—the new term that has emerged) may be harder to resolve.  Telecommuting has also added to the labor change, as it started growing pre-COVID-19 and is now in full swing, with most offices still more empty than full.  Still, optimism prevails, as money flowed into the market (which helps to keep nervous money managers in), and the S&P 500 posted new closing highs (70 for the S&P 500 in 2021, ranking second only to 1995’s 77), as the “don’t fight the Fed” saying changed to “don’t fight the flow” (for a while it was “don’t fight the FT—the Fed and the Treasury).


ETF Transactions by U.S. Insurers in Q3 2021

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Raghu Ramachandran

Head of Insurance Asset Channel

INTRODUCTION

Over the first three quarters of 2021, U.S. insurance companies traded almost USD 48 billion in ETFs.  The amount traded increased in each quarter.  After a sluggish second quarter, insurance companies resumed buying Fixed Income ETFs in the third quarter.  However, they continued to exit Equity ETFs.  Over the three quarters, insurance companies added USD 2.6 billion into ETFs.  In this report, we analyze these trades and explore the differences of insurance ETF usage over the first three quarters of 2021.

ETF TRADES

In the third quarter, insurance companies traded USD 16.5 billion in ETFs; this was 56% larger than the USD 10.6 billion they traded in the third quarter of 2020. However, trading was 3% lower YTD than in 2020, mostly because of the unusually large volume of trading in the first quarter of 2020.

As seen before, trading volume was not uniform throughout the Q3 2021 period. Trading by insurance companies was fairly subdued in the beginning of the third quarter but picked up toward the end (see Exhibit 1).

While overall trading was split evenly between Fixed Income and Equity, companies exhibited significantly different behaviors in each quarter. They traded evenly in the first quarter, more Fixed Income in the second, and more Equity in the third (see Exhibit 2).

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U.S. Equities Market Attributes November 2021

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Howard Silverblatt

Senior Index Analyst, Product Management

KEY HIGHLIGHTS

U.S. Equities Market Attributes November 2021

MARKET SNAPSHOT

Another COVID-19 variant emerged, as was expected, and the World Health Organization named it Omicron.  It will take at least another week to determine any of the infection or health hazards of Omicron, but the initial data on the variant has it containing approximately 50 mutations, with 30 spike proteins (which allow it to attach to human cells).  Even before Omicron emerged, infections were on the rise (especially in Europe), as were restrictions, and many countries have now added travel restrictions to slow the potential spread of Omicron.  As for the market’s reaction, it was strong, but not significant.  In the U.S., the S&P 500 declined 2.27% when the news was released during Black Friday’s shortened holiday session (Nov. 26, 2021), the third worst day of the year (646th worst since 1928), which left the S&P 500 2.34% off its Nov. 18, 2021, closing high (its 66th of the year, second only to 1995’s 77).  While the impact of the variant was not known, the Street took an optimistic view (buy on the dip), not seeing (or wanting to see) a return to lockdowns, as it recouped 1.32% the next day.  Then on the following day, Tuesday (Nov. 30, 2021) came Powell’s disallowance of elevated inflation as transitory, as tapering was seen as happening more quickly (with the first rate hike earlier than expected; no more debate on one or two increases in 2022).  As a result, the S&P 500 declined 1.90% for the day, turning the month negative at -0.83%, but only 2.92% away from a new closing high and up 21.59% YTD (after 16.26% in 2020)

As for the part of the month not as affected by Omicron COVID-19 news (the first 18 of the 21 trading days), the S&P 500 posted seven new closing highs, and both earnings and sales (as well as buybacks and dividends) appeared to set a quarterly record.  Consumers continued to be the backbone, as pre-holiday shopping increased, spurred on by supply concerns.  Initial estimates for the start of the actual holiday season (Black Friday) showed an estimated 48% increase over the depressed 2020 period as customers returned to the stores, but it was still 28% shy of the 2019 level, as Americans spent an estimated USD 8.9 billion (margins are expected to be much higher).  As for my indicator, my wife and daughter ventured out for their 17th Black Friday expedition (this year starting in SoHo, then making their way up to Midtown), as they reported banners were large, but sales were few, and some limited inventories had them texting me to make a run to Hudson Yards for a jacket (it’s not my area, but that shopping center was not crowded at all, and the jacket had a minor 10% discount; there were only two in stock).  Cyber Monday added (disappointingly) to the spree, but U.S. shoppers have been on cyber for most of the pandemic.

At this point, COVID-19 does not appear to be the biggest long-term Street fear, although it could have the largest impact if the new (or next) variant turns out to be worse than expected.  The honor of biggest Street fear goes to inflation, which continues to be fed by supply shortages, labor costs, worker shortages, and consumers, who have not pulled back (high demand).  The shorter-term fear, however, is the budget, which is due Dec. 3, 2021 (which some feel will be given another band-aid), and the debt (which should meet its limit in the first half of December), as many on the Street still look for a Santa Claus rally.  Given the inflows and optimism, far be it for me to say “bah humbug”—long live irrational exuberance (and may the trades be with you).

The S&P 500 closed at 4,567.00, down 0.83% (-0.69% with dividends) for November from last month’s 4,605.38, when it was up 6.91% (7.01%), and the prior month’s 4,307.54 close, when it was down 4.76% (-4.65%).  The three-month return was 0.98% (1.32%), the YTD return was 21.59% (23.18%), the one-year return was 26.10% (27.92%), and the index was up 34.87% (38.80%) from its pre-COVID-19 closing high on Feb. 19, 2020 (there have been 85 new closing highs since the pre-pandemic high).  The S&P 500 posted seven new closing highs in November (5 in October, 1 in September, 12 in August, 7 in July, 6 in June, 1 in May, 10 in April, and 5 in March, February, and January) and 66 YTD; it has posted new closing highs in every month since November 2020 (it missed October 2020 but had new closing highs in August and September 2020).  Since Biden won the Nov. 3, 2020, U.S. election, the S&P 500 has gained 35.55% (37.74%), with 64 closing highs since his inauguration (Jan. 20, 2021).  The bull market was up 104.12% (109.64%) from the low on March 23, 2020.  The index closed the month 2.92% off its Nov.18, 2021, closing high (4,704.54).

The S&P 500 started November where it ended October, with more new closing highs (the last two days of October posted new closing highs; Oct 29-30, 2021).  November opened with a perfect week—all five days had a new closing high (Nov. 1-5, 2021; making it seven trading days in a row).  The index went on to post another the following Monday (Nov. 8, 2021; making it eight trading days in a row—it was the fifth such occurrence since 1928).  The index then defended its gains but continued on, setting another new closing high on Nov. 18, 2021, making it 66 new closing highs YTD (second only to the record 77 in 1995).  The last three trading days of the month (after the Thanksgiving Day holiday) posted 1% moves, as reaction to the Omicron variant produced a knee-jerk decline of 2.27%, while the next day rebounded 1.32%, but then Chair Powell’s testimony of higher inflation and more tapering led into a decline of 1.57% for the end of the month.


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