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Global Equity Bulletin

 
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June 2015

GREECE: HOW WOULD A “GREXIT” AFFECT INDEX PROVIDERS?
Greece’s snap referendum and abandonment of negotiations with their creditors – largely Eurozone members, the European Commission, the European Central Bank (ECB) and the International Monetary Fund (IMF) – rattled the market during the last few weeks. The suspension of the Emergency Liquidity Assistance (ELA) from the ECB meant that the Greek government needed to impose extended bank holidays and capital controls to stop a drain on bank liquidity. This all culminated in Greece missing a 1.55 billion euro payment to the IMF, effectively making the country default. Greece is now going through a tough renegotiation period with its creditors and had to pass initial reforms to demonstrate its commitment to a deal. This plan is significantly more extensive and aggressive than the one the Greek people voted down at the referendum.

The deterioration of the Greek market has investors questioning whether index providers are going to take Greece out of the various indices. Will we see Greece, which MSCI and Russell only recently downgraded to an emerging market from a developed one, demoted again? The ongoing financial crisis, loss of investor confidence in Greek securities and the sharp selloff in the local market, make this a question worth asking.

Russell announced in June that it is currently not going to invoke the financial crisis rule to remove Greece from the Russell Global index. It has maintained that it will monitor the ongoing crisis and act appropriately on any new information.

MSCI also is watching the situation closely and may relegate Greece to a “stand-alone” market status. This effectively would exclude Greece from the Emerging Market index if the prolonged use of restricted measures caused the market to continue deteriorating.

FTSE is following its index policy when a market is untradeable by consulting with clients over the next 20 business days ended Friday, July 24, to assess the likely duration and impact of the stock market closures and capital controls. It has noted that if removed from FTSE global indices, Greek securities will be available in a stand-alone index.

CHINA – TIME TO BE A-SHARE OF THE MARKET?
Despite recent volatility, the reasons investors want to invest in China for the longer term are still compelling. As the second-largest economy by gross domestic product (GDP) and the world’s dominant manufacturer, China would offer significant investment opportunities over the coming decades if it opened its domestic market to foreign investors.

The opportunities within Chinese equity markets still have investors increasingly asking the major index providers: “When is the right time to include Chinese shares in the world’s major benchmarks? China has shown a strong willingness to open the local Chinese stock market to international investors. The launch of the Shanghai-Hong Kong Stock Connect program was an important signal to the market. More recently, we have seen R/QFII allocations increase and improvements within the application process, which previously was a significant stumbling point for inclusion.

On those grounds, FTSE Russell announced on May 26 that it will begin to transition China “A” shares into its global benchmarks, with the launch of the FTSE China A Inclusion Indexes. These indices offer a range of choices to prepare investors for the eventual inclusion. Currently, China A shares are not eligible for inclusion in the FTSE global benchmarks due to failing on a capital mobility and a settlement/clearing requirement. FTSE Russell has, however, said it expects that China A shares will be eligible for inclusion to the global benchmarks within two to three years.

MSCI has taken a different approach and is not currently moving to include the domestic Chinese market into its benchmarks. The main reasons cited by MSCI were that institutions are still dissatisfied with the quota allocation system, restrictions on capital mobility and the ambiguous ownership rules for investments made via the stock-connect program. MSCI’s decision aligns with our own beliefs about issues with the domestic China equity market. MSCI did note that it will work closely with the China Securities Regulatory Commission to resolve the remaining issues.

ANNUAL RUSSELL REBALANCE REVIEW
The annual Russell Reconstitution occurred at the close of trading on June 26, 2015.

Russell continued to enhance its methodology this year. In prior rebalances, a single share class was designated as the primary share, and companies with multiple share classes would have all shares combined under that listing in the index. With the 2015 rebalance, prompted by listings in Google, Liberty Global, and Discovery Communications, Russell will now include multiple share classes. Standard & Poor’s also revised its methodology and has slowly begun to incorporate multiple share listings of newly issued secondary listings. In September 2015, it will begin to include multiple share listings of existing stocks within its primary benchmarks.

The Russell benchmarks will use the combined value of the shares to determine if the company is included in the Russell 1000 or 2000. Once the company’s size is calculated, individual share classes are evaluated to determine eligibility. If the secondary share classes do not meet the liquidity requirements, the shares will still be combined under the primary share class. But secondary shares that meet the liquidity requirements will be included in the Russell indexes separately. Exhibit 1 shows the multiple share classes included in this review.



Source: Russell


Turnover summary

The overall turnover has remained fairly constant over the last five years. This year’s methodology change had little impact on the turnover. The buffer rules implemented in prior years helped stabilize turnover in the last five years.

 
Source: Bloomberg, Barclays, Northern Trust


Performance

Due to the Russell reconstitution, June 26 had the highest volume of 2015. However, the excess trading did not have a dramatic impact on performance. While Russell 2000 additions outperformed deletions, both baskets underperformed the index on the effective date, with the additions underperforming the benchmark by -0.90% and deletions underperforming the benchmark by -1.18%. Russell 1000 additions outperformed the Russell 1000 by 0.31% on the effective date.

 
Source: Bloomberg, JP Morgan, Northern Trust


MSCI SEMI-ANNUAL MAY REBALANCE

The objective of the MSCI semi-annual index review is to reflect changes due to corporate events and market performance. Newly eligible companies were identified and current constituents were re-weighted based on the new market size-segment cutoffs. This resulted in additions, deletions, float and share changes to the indexes effective on the close of Friday, May 29, 2015.

MSCI Developed World Summary
Based on the review, 36 companies were added to the World Index, while 17 were deleted. Two-way turnover was 1.94% versus 1.1% in November 2014. Of the 36 additions, 29 were in North America, five were in Europe and the Middle East and two were in Asia Pacific. Of the 17 deletions, 12 were in the North American region, three were in Europe and the Middle East, and two were in Asia-Pacific. Thirty-one of the additions were migrations from the small-capitalization index, and 16 of the deletions were migrations to the small-cap index. The largest weight increases by country was the United Kingdom (+0.038%), and the largest decrease was Japan (-0.029%). On a sector basis, software services had the largest increase, while energy had the largest decline. On a net basis, the number of constituents in the MSCI World Index increased by 19 names to 1,640 with a market capitalization of US$34.5 trillion.

The MSCI World Small Cap Index saw 205 security additions and 197 deletions, resulting in one-way index turnover of 5.3% versus 4.0% in November 2014. Of the 205 additions, 113 were in North America, 48 in Asia-Pacific and 44 in Europe and the Middle East. Of the 197 deletions, 93 were in North America, 63 in Asia-Pacific and 41 in Europe and the Middle East. The largest weight increase by country was the United States (+1.00%), and the largest decrease was Switzerland (-0.20%). On a net basis, the number of constituents in the MSCI World Small Cap Index increased by nine names to 4,294 with a market capitalization of US$5.4 trillion.

MSCI Emerging Market Summary
In the Emerging Markets Index, 31 securities were added and 27 were deleted, resulting in a 1.82% increase in market capitalization. One-way index turnover was 2.6% versus 1.3% in November 2014. Of the 31 additions, 24 were from the Asia-Pacific region, zero was from Latin America and seven were from Europe and the Middle East. Of the 27 deletions, 15 were from the Asia-Pacific region, seven were from Latin America and five were from Europe and the Middle East. The largest country increase in weight was India (+0.48%), and the largest decrease was in Brazil (-0.22%). On a sector basis, real estate had the largest increase (+0.29%), while energy (-0.21%) had the largest decline. The number of constituents in the emerging markets index increased to 839 securities, with a market capitalization of US$4.2 trillion.

There were 194 security additions and 95 deletions from the Emerging Markets Small Cap Index, resulting in one-way index turnover of 9.9% versus 8.5% in November 2014. Of the 194 additions, 176 were in emerging markets Asia, with six in Latin America and 12 in Europe and the Middle East. Of the 95 deletions, 61 were in emerging markets Asia, 16 in Latin America and 18 in Europe and the Middle East. The largest country increase in weight was India (+1.1%), and the largest decrease was China (-1.3%). On a net basis, the number of constituents in the MSCI Emerging Markets Small Cap Index increased by 99 names to 1,888 with a market capitalization of US$667 billion.


Important Information

© 2015 Northern Trust Corporation. Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A. Incorporated with limited liability in the U.S. Products and services provided by subsidiaries of Northern Trust Corporation may vary in different markets and are offered in accordance with local regulation. For legal and regulatory information about individual market offices, visit northerntrust.com/disclosures.

Index returns do not assume the deduction of any management fees, trading costs or expenses. Direct investment in an index is not possible. Indices and trademarks are the property of their respective owners. All rights reserved.

The information cannot be relied upon for tax purposes, does not constitute investment advice or a recommendation to buy or sell any security and is subject to change without notice.

Information intended for use with institutional investors only.

Past performance is not necessarily a guide to the future. Index performance returns do not reflect any management fees, transaction costs or expenses. One cannot invest directly in an index. Index performance is based upon information provided by the index providers. Indices and trademarks are the property of their respective owners, all rights reserved. There are risks involved with investing, including possible loss of principal. For Asia Pacific markets, this material is directed to institutional investors, expert investors and professional investors only and should not be relied upon by retail investors. This information is provided for informational purposes only and does not constitute a recommendation for any investment strategy or product described herein. This information is not intended as investment advice and does not take into account an investor’s individual circumstances. Opinions expressed herein are subject to change at any time without notice. Information has been obtained from sources believed to be reliable, but its accuracy and interpretation are not guaranteed.

Northern Trust Asset Management is composed of Northern Trust Investments, Inc., Northern Trust Global Investments Limited, Northern Trust Global Investments Japan, K.K., NT Global Advisors, Inc., 50 South Capital Advisors, LLC, and personnel of The Northern Trust Company of Hong Kong Limited and The Northern Trust Company.

This material is directed to professional clients only and is not intended for retail clients. For Asia-Pacific markets, it is directed to institutional investors, expert investors and professional investors only and should not be relied upon by retail investors. For legal and regulatory information about our offices and legal entities, visit northerntrust.com/disclosures. The following information is provided to comply with local disclosure requirements: The Northern Trust Company, London Branch; Northern Trust Global Services Limited; Northern Trust Global Investments Limited. The following information is provided to comply with Article 9(a) of The Central Bank of the UAE’s Board of Directors Resolution No 57/3/1996 Regarding the Regulation for Representative Offices: Northern Trust Global Services Limited, Abu Dhabi. Representative Office. Northern Trust Global Services Limited Luxembourg Branch, 2 rue Albert Borschette, L-1246, Luxembourg, Succursale d’une société de droit étranger RCS B129936. Northern Trust Luxembourg Management Company S.A., 2 rue Albert Borschette, L-1246, Luxembourg, Société anonyme RCS B99167. Northern Trust (Guernsey) Limited (2651)/Northern Trust Fiduciary Services (Guernsey) Limited (29806)/Northern Trust International


INDEX DATA

GLOBAL BENCHMARK PERFORMANCE

Index performance data contain backtested returns. All data as of 30 June 2015.
* Returns are gross of dividend withholding tax assumptions.
Source: Northern Trust, FactSet, Bloomberg.

Global BEnchmark Performance (Cont’d)

Index performance data contain backtested returns. All data as of 30 June 2015.
Source: Northern Trust, FactSet, Bloomberg, Russell, MSCI,FTSE, S&P Dow Jones, Barclays, Citigroup, JPMorgan, Morningstar.
U.S. equity index returns are gross of dividend withholding tax assumptions.
Returns of non-U.S. and global indices are net of dividend withholding tax assumptions.

ALTERNATIVELY WEIGHTED INDEX PERFORMANCE – DEVELOPED MARKETS

Index performance data contain backtested returns. All data as of 30 June 2015
Sources: Northern Trust, FactSet, Bloomberg, MSCI, FTSE, Russell, S&P Dow Jones, Morningstar.
*Returns are gross of dividend withholding tax assumptions.
Performance includes backtested returns.

ALTERNATIVELY WEIGHTED INDEX PERFORMANCE – EMERGING MARKETS

Index performance data contain backtested returns. All data as of 30 June 2015.
Sources: Northern Trust, FactSet, Bloomberg, MSCI, FTSE, Russell, S&P Dow Jones, Morningstar.
Performance includes backtested returns.

ALTERNATIVELY WEIGHTED INDEX PERFORMANCE – UNITED STATES

Index performance data contain backtested returns. All data as of 30 June 2015.
Sources: Northern Trust, FactSet, Bloomberg, MSCI, FTSE, Russell, S&P Dow Jones, Morningstar.
*Returns are gross of dividend withholding tax assumptions.
Performance includes backtested returns.

ENVIRONMENTAL SOCIAL GOVERNANCE (ESG) BENCHMARK PERFORMANCE

Index performance data contain backtested returns. All data as of 30 June 2015
Source: Northern Trust, FactSet, MSCI, S&P Dow Jones, FTSE. Data as of March 31, 2015. All returns are gross of dividend withholding taxes.

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© 2015 Northern Trust Corporation. Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A. Incorporated with limited liability in the U.S. Products and services provided by subsidiaries of Northern Trust Corporation may vary in different markets and are offered in accordance with local regulation. For legal and regulatory information about individual market offices, visit northerntrust.com/disclosures.

Index returns do not assume the deduction of any management fees, trading costs or expenses. Direct investment in an index is not possible. Indices and trademarks are the property of their respective owners. All rights reserved.

Northern Trust Asset Management comprises Northern Trust Investments, Inc., Northern Trust Global Investments Limited, Northern Trust Global Investments Japan, K.K., NT Global Advisors, Inc. and investment personnel of The Northern Trust Company of Hong Kong Limited and The Northern Trust Company.
This material is directed to professional clients only and is not intended for retail clients. For Asia-Pacific markets, it is directed to institutional investors, expert investors and professional investors only and should not be relied upon by retail investors. For legal and regulatory information about our offices and legal entities, visit northerntrust.com/disclosures. The following information is provided to comply with local disclosure requirements: The Northern Trust Company, London Branch; Northern Trust Global Services Limited; Northern Trust Global Investments Limited. The following information is provided to comply with Article 9(a) of The Central Bank of the UAE’s Board of Directors Resolution No 57/3/1996 Regarding the Regulation for Representative Offices: Northern Trust Global Services Limited, Abu Dhabi Representative Office. Northern Trust Global Services Limited Luxembourg Branch, 2 rue Albert Borschette, L-1246, Luxembourg, Succursale d’une société de droit étranger RCS B129936. Northern Trust Luxembourg Management Company S.A., 2 rue Albert Borschette, L-1246, Luxembourg, Société anonyme RCS B99167. Northern Trust (Guernsey) Limited (2651)/Northern Trust Fiduciary Services (Guernsey) Limited (29806)/Northern Trust International Fund Administration Services (Guernsey) Limited (15532) Registered Office: Trafalgar Court Les Banques, St Peter Port, Guernsey GY1 3DA.