IN THIS LIST

A Balanced Approach to China A-Shares: The S&P China A 300 Index

Examining the Growth of Decrement Indices

Global Sector Primer Series: Information Technology

Collaborating Efficiently in the Rise of Remote Work

Gauging Opportunities from the Hydrogen Economy

A Balanced Approach to China A-Shares: The S&P China A 300 Index

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Michael Orzano

Senior Director, Global Equity Indices

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John Welling

Director, Global Equity Indices

INTRODUCTION

China’s economy and equity market have grown substantially in size and prominence over the past decade.  Mainland-listed China A-shares have likewise become more accessible to global investors during this expansion, broadening the opportunity set beyond offshore shares.  As of Jan. 28, 2022, over 70% of China’s total equity value—equivalent to USD 12.5 trillion in total market cap—was represented by onshore listings, making the A-share market the second largest globally after the U.S.

Since 2004, the S&P China A 300 Index has offered efficient, representative exposure to these onshore companies.  In this overview, we will cover the following key points.

  • Reasons one may want to consider China A-shares, including their underrepresentation in broad benchmarks, differentiated investment characteristics, and high return dispersions compared to offshore shares.
  • The S&P China A 300 Index has an extensive track record and offers potential methodology advantages compared with the widely used CSI 300, including:
    • The exclusion of sanctioned securities;
    • A sector balance consideration to improve industry diversification; and,
    • A profitability requirement to eliminate companies without a track recored of generating posititive earnings.

    CONSIDERATIONS FOR A-SHARE EXPOSURE

    While Chinese equities have grown in importance for international market participants, A-shares are limited to partial inclusion factors within broad benchmarks, leaving them significantly underrepresented in conventional Chinese and emerging market indices. While offshore-focused benchmarks tend to capture growth in technology-focused Consumer Discretionary and Communication Services sectors, onshore indices continue to provide broad exposure to traditional sectors and a growing share of Information Technology and Consumer Staples companies. Without representative inclusion of A-shares, China-specific exposure within indices could be considered incomplete.

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Examining the Growth of Decrement Indices

OVERVIEW FROM A GLOBAL PERSPECTIVE

A decrement is an overlay applied to a given base index.  A decrement index is constructed by deducting a predefined dividend or fee at predefined intervals from the total return of the base index.

S&P Dow Jones Indices (S&P DJI) has been publishing decrement indices since 2016.  Initially using the term “synthetic” or “premium” in index names, we subsequently unified the naming convention to “decrement” indices.  We have developed a transparent decrement framework through a series of decrement indices, including the S&P 500 Decrement Indices, S&P ESG Decrement Indices, and multi-asset decrement indices.

The decrement methodology can be overlaid on any of our globally accepted, independent underlying indices.  The parameters used in the calculation of decrement indices can be customized based on product issuer or market participant requirements.

CHANGES IN DEMAND

One key trend we observed in 2021 was further expanding demand in Asia and the U.S.  Being the first region to enter a zero or negative interest rate regime, Europe is ahead of other regions in the development of decrement index-linked products.  A low-rate environment makes it challenging for issuers to provide attractive terms and triggers the search for a new underlying asset that could deliver cheaper optionality.  Decrement indices were designed to provide a solution for this challenge.  With interest rates dropping further globally after the pandemic began, we started to see growing demand for decrement indices in Asia and the U.S. as well.

Another key trend has been increasing interest in ESG and thematic benchmarks as the underlying indices for decrement strategies.  ESG and megatrend investing have been growing steadily over time, and they tend to land in the spotlight during extreme events, such as the global pandemic.  With ESG and thematic investing growing at a faster pace since the pandemic started, decrement strategies on these topics are picking up globally.

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Global Sector Primer Series: Information Technology

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Hector Huitzil Granados

Analyst, Global Equity Indices

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Michael Orzano

Senior Director, 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 sub-industry is the most specific 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 Information Technology sector includes companies primarily engaged in:

  • Providing services related to the sector (such as information technology, systems integration, electronic data processing and business process outsourcing services);
  • Providing infrastructure and services for the internet industry;
  • Producing and developing software for specialized applications for business or consumer markets (excluding companies in the interactive home entertainment sub-industry);
  • Manufacturing communication and electronic equipment, cellphones, computers, peripherals, servers, electronic computer components, electronic components and instruments;
  • Distributing technology hardware and equipment; or
  • Manufacturing semiconductors, semiconductor equipment and related products.

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    Collaborating Efficiently in the Rise of Remote Work

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    Claire Yi

    Analyst, Strategy Indices

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    Jason Ye

    Director, Strategy Indices

    The onset of the COVID-19 pandemic has caused tremendous changes to the economic and social world, completely revamping the way we communicate and collaborate in the work environment.  Corporations globally have been rethinking work models as we start to consider the post-pandemic world.  Even as some countries start to open up gradually, more flexible work arrangements seem to be popular options going forward, and corporations will need strategies that help workers collaborate efficiently.

    Enterprise collaboration might be the answer.  Enterprise collaboration is a set of solutions designed to help users communicate and complete work tasks within their enterprise.  It includes various tools, platforms, groupware, and networks, which are intended to empower enterprise-wide coordination.  The enterprise collaboration market size is expected to grow from USD 47.2 billion in 2021 to USD 85.8 billion by 2026.  S&P Dow Jones Indices launched the S&P Kensho Enterprise Collaboration Index to track companies involved in the enterprise collaboration market.

    From 2020 to 2022, during which 55% of global businesses offered the capacity to work from home, enterprise collaboration shaped the online working style by enabling individuals and teams to work together via the internet.  Since the COVID-19 outbreak, the demand for better enterprise collaboration solutions has continued to evolve and likely be a main trend for the long term.

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    Gauging Opportunities from the Hydrogen Economy

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    Jason Ye

    Director, Strategy Indices

    EXECUTIVE SUMMARY

    The Fourth Industrial Revolution will be driven by renewable energy, and in the context of energy transition, hydrogen could play a vital role.  According to the International Energy Agency (IEA), to achieve net zero emissions by 2050, an investment of USD 1.2 trillion in low-carbon hydrogen supply and use would be required. The hydrogen council projected a USD 2.5 trillion global hydrogen market by 2050. The U.S. Department of Energy projected an estimated USD 750 billion annual revenue and a cumulative 3.4 million jobs created by 2050 under the hydrogen economy. Leveraging advanced machine learning and natural language processing technology, S&P Dow Jones Indices launched the S&P Kensho Hydrogen Economy Index, which is designed to track companies involved in the hydrogen economy, including companies focused on the production, transportation, and storage of hydrogen.  In this paper, we will introduce the hydrogen economy, and how we measure the opportunity from it through an indexing approach.

    INTRODUCTION

    Hydrogen is the simplest and smallest element in the periodic table.  It is also the most abundant chemical substance in the universe, constituting roughly 75% of all normal matter.  On Earth, hydrogen is mostly found in molecular forms such as water and organic compounds.  Like electricity, hydrogen is also secondary energy.  Hydrogen can be produced from water; when molecular hydrogen and oxygen are combined and react, the process generates energy, and either water or hydrogen peroxide is produced.  The heating value of the process is 141.80 MJ/kg, which is 3 times the heat value of diesel (44.80 MJ/kg), and 4.3 times the heat value of coal (32.50 MJ/kg). Unlike burning diesel or coal, the combustion process of hydrogen generates zero carbon emissions.  If we can reduce or eliminate the carbon emission in the hydrogen production process, it could be a clean, efficient, and sustainable energy source that would likely play an essential role in the decarbonization movement of the next few decades.

    Professor John Bockris came up with the term “hydrogen economy” in his speech at the General Motors Technical Center in 1970.  However, the process of establishing a hydrogen economy has historically been slow and challenging, primarily due to the large scale of infrastructural investment required and high hydrogen production costs.  As of 2020, the global demand for hydrogen was about 70 million tons (see Exhibit 1).  Almost all this demand was for refining and industrial use, such as decreasing sulfur content in diesel fuel and production of ammonia and methane.  In the future, hydrogen can replace natural gas to provide heat for buildings, and be used for oil refinement, cement production, and steelmaking in the industrial sector.  It can serve as an alternative to fossil fuel for vehicles such as buses, trains, ships, and even airplanes.  In addition, hydrogen can be used as a storage of low-cost, excess renewable electricity, which could support the integration of renewable electricity systems.  Under the net zero by 2050 scenario, global hydrogen demand could almost triple by 2030, reaching over 200 million tons (see Exhibit 1).

    On the production side, currently, hydrogen is produced mainly from fossil fuels (gray hydrogen), resulting in close to 900 million tons of CO2 emissions per year. Under the net zero scenario, the growth of hydrogen demand would be supplied by the production of blue hydrogen and green hydrogen (see Exhibit 1).

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