Why the S&P and EM Are Working, Gold ETF Flows

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Why the S&P and EM Are Working, Gold ETF Flows

Three Data items today:

#1: It’s obviously very early in the year, but we got to thinking about the S&P 500’s 1.4 percent gain in 2021 and wondered what was driving this lift.

  • Starting with what’s NOT working, Big Tech tops the list. Microsoft (-2.7 percent), Apple (-1.4 pct), Amazon (-2.8 pct), Google (flat, +0.1 pct) and Facebook (the worst of the lot, -7.9 pct.)
  • The Tech sector is basically stuck in neutral, down 0.1 percent YTD.
  • In terms of what IS working, we need to start with Tesla. The most analyzed (and derided) S&P addition of all time is up 21 percent YTD (not a typo).

    TSLA’s move this year is worth 0.38 percentage points of performance to the S&P. Put another way, Tesla’s stock makes up 27 percent of the entire move in the 500 for 2021 to date.
  • In terms of sector contributions, Consumer Discretionary’s 4.6 percent YTD gain has been worth 0.59 points to the S&P 500, or 42 percent of the index’s YTD gains. Considering that Amazon is 21 percent of the sector, that’s impressive.
  • Large cap Financials are the other standout, up 6.2 percent YTD. That equates to 0.67 percentage points of S&P performance, or 48 percent of YTD gains.

Takeaway: the (very) early 2021 rally is all about a steepening yield curve (Financials), fiscal stimulus (Consumer Discretionary) and Tesla. Combined, these are over 100 percent of the YTD move in the S&P 500. Tech (sector and 2020 leadership names) is playing no role save for TSLA. This analysis may well be a bit of a roadmap for 2021, one where US equities do OK even without a tailwind from 2020’s usual suspects.

#2: Same thought about the MSCI Emerging Markets Index, which has started the year with a bang: up 5.7 percent.

  • MSCI China is doing fine, up 5.4 percent, but is actually lagging EM a bit. China is 38 percent of the index.
  • Rather, it is South Korea and Taiwan that are really pulling the EM train along. MSCI South Korea is up 9.9 percent in dollar terms. MSCI Taiwan is up 8.2 percent in dollar terms.
  • The largest single stock weightings of the MSCI EM Index tell a similar story. For the first time we can remember, Taiwan Semi is the largest EM index company with a 6.3 percent weight. It is up 9.4 percent YTD, almost double Tencent’s 5.7 pct YTD gain and much better than Alibaba’s 1.1 pct YTD advance. South Korea’s Samsung is also doing better than China’s “Big Tech”, up 5.9 percent YTD.

Takeaway: EM is a similar story to the S&P 500, in that 2021 YTD’s positive returns are due to a strong bench rather than big hits from the star players. Regular readers know we’ve always been concerned about EM’s China weighting even as we have said it’s OK to own just now. Early 2021 returns show that, like the S&P 500, reasonable gains in EM equities are possible even if the countries/stocks at the top of the stack don’t all hit it out of the park.

#3: We’ve been tracking global gold ETF fund flows closely since June, and the World Gold Council just published their December 2020 data. As you can see in their chart, reproduced below, December saw redemptions to the tune of 40.1 troy tons of gold. This was not as much of a drop as November’s 108.7 troy ton decline, but the difference between the last 2 months of 2020 and the first 10 months is stark.

Takeaway: demand from financial buyers will be important to the price of gold until global economies return to normal and jewelry demand picks up again. As a reminder, we recommend a 3-5 percent position in gold for diversified portfolios. To our thinking it’s not a particularly good crisis hedge, but with inflation concerns rising (see Jessica’s Beige Book review today) gold should perform well in 2021.

Sources:

World Gold Council ETF Report (recommended for readers with gold holdings): https://www.gold.org/goldhub/data/global-gold-backed-etf-holdings-and-flows