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On the Precipice: Will Global Markets Follow Commodities? [Chart]

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On the Precipice: Will Global Markets Follow Commodities? [Chart]

On the Precipice [Chart]

Will global markets follow commodities off the cliff?

The Chart of the Week is a weekly Visual Capitalist feature on Fridays.

From 1970 to 2004, commodities moved the opposite direction of assets like equities and bonds. For example, it was during times such as the 1990s that cheap inputs like oil and metals helped to fuel growth in industries across the globe.

When the oil price spiked, like in instances such as the Iranian Revolution and the subsequent Iran-Iraq War in 1980, the market reacted accordingly. In that particular case, inflation jumped to 11.3% in 1979 and 13.5% in 1980, a US recession was triggered, and many economic sectors were hit hard.

However, as we see in today’s chart, from 2001-2012 commodities (as measured by the Bloomberg Commodities Index) have more or less kept in line with the S&P 500. This is historically unusual and many analysts expected it would not last. In 2012, commodities diverged in a big way.

Gold and silver were the first to drop off. More recently, it was base metals and oil that fell off the cliff because of slowing growth in China and supply gluts. Today, the Bloomberg Commodity Index and the TSX Venture Composite Index are lower than they have ever been since their inception. The former is down -19.9% from the beginning of 2001. The Venture is down -40.1% since then.

Today may be the end of this trend of divergence. US equities are at a precipice: fueled by low rates and quantitative easing for years, they have finally started to tumble from record highs. Yesterday, the Dow had its largest one-day drop since April 2014 as it slid 350 points. Even tech darlings were down as $49 billion in market capitalization was wiped out, with Apple, Google, Netflix, Facebook, and Twitter all getting crushed in trading yesterday. Market sentiment is decidedly worse than it has ever been in recent years with the tailwinds of Greece, Puerto Rico, China, and other problems.

Making predictions are the dumbest possible idea, but they say that fortune favours the brave.

So here are some bold predictions:

Gold will at least hold its current value, if not see gains in the upcoming six month. US equities do not see sizable gains for awhile. The Fed does not hike rates in September (or if they do, it will be to a lack of fanfare from the markets). Industrial commodities like base metals will continue to drop off a little further as the overall market feels like it has lost momentum and supply gluts remain supreme.

What do you think will happen in the short and medium term?

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Finance

Unlocking the Return Potential in Factor Investing

Factor investing has demonstrated its potential to outperform the general market for years. In this infographic, learn how to apply it in your portfolio.

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factor investing

What is the best way to predict success?

In baseball, the game’s strategy was forever changed when Oakland Athletics traded in the standard scout’s intuition for a data-driven approach. It was a switch that eventually led the team to an impressive 20-game winning streak, depicted in the movie Moneyball—it also kickstarted a broader revolution in sports analytics.

Similarly, successful data patterns are also being discovered by experts in the investing world. One such framework is factor investing, where securities are chosen based on attributes that are commonly associated with higher risk-adjusted returns.

Factor Investing 101

Today’s infographic comes to us from Stoxx, and it explains how factor investing works, as well as how to apply the strategy in a portfolio.

Factor Investing infographic

A Selective Approach

There are two main types of factors. Macroeconomic factors, such as inflation, drive market-wide returns. Style factors, such as a company’s size, drive returns within asset classes.

Analysts have numerous theories as to why these factors have historically outperformed over long timeframes:

  • Rewarded risk
    Investors can potentially earn a higher return for taking on more risk.
    • Behavioral bias
      Investors can be prone to acting emotionally rather than rationally.
      • Investor constraints
        Investors may face constraints such as the inability to use leverage.

      Astute investors can capitalize on these biases by targeting the individual factors driving returns.

      The Common Style Factors

      Based on academic research and historical performance, there are five style factors that are widely accepted.

      1. Size: Smaller companies have historically experienced higher returns than larger companies
      2. Low Risk: Stocks with low volatility tend to earn higher risk-adjusted returns than stocks that have higher volatility.
      3. Momentum: Stocks that have generated strong returns in the past tend to continue outperforming.
      4. Quality: Quality is identified by minimal debt, consistent earnings, steady asset growth, and good corporate governance.
      5. Value: Stocks that have a low price compared to their fundamental value may generate higher returns.

      It is becoming more straightforward for investors to implement these factors in a portfolio.

      How Can You Apply Factor Investing?

      All investors are exposed to factors whether they are aware of it or not. For example, an investor who puts capital in an ESG fund—targeting companies with good corporate governance—will have some level of quality exposure.

      However, there are various approaches investors can take to implement factors intentionally.

      Single Factors

      Factors perform differently over the course of a market cycle. For example, low volatility stocks have historically performed well during market downturns such as the 2008 financial crisis or the 2015 sell-off.

      Investors can consider macroeconomic information and their own market views, and adjust their exposure to individual factors accordingly.

      Multi-factor

      Factors tend to exhibit low or negative correlation with each other. For a long-term strategy, investors can combine multiple factors, which increases portfolio diversification and may provide more consistent returns.

      Long-short

      For each factor, there are investments that lie on either end of the spectrum. Experienced, risk-tolerant investors can employ a long-short strategy to play both sides:

      • Hold long positions in attractive securities, such as those with upward momentum
      • Hold short positions in unattractive securities, such as those with downward momentum

      This diversifies potential return sources, and reduces aggregate market exposure.

      Capturing Factors Through Indexing

      Active managers have been selecting securities based on factors for decades. To capture factors with precision, managers must carefully consider numerous elements of portfolio construction, such as the starting investment universe and the relative weight of securities.

      More recently, investors can access factor investing through another method: indexing. An indexing approach provides a framework for capturing these factors, which helps simplify the investment process. Based on objective rules, index solutions provide a higher level of transparency than some active solutions.

      Not only that, their efficiency makes them more suitable as tools for building targeted outcomes.

      The Future of Factors

      In light of indexing’s various benefits, it’s perhaps not surprising that exchange-traded factor products have seen immense growth in the last decade.

      In addition, there’s still plenty of room for factor ETF expansion in equities and other asset classes. Only about 1% of factor ETFs invest in fixed income, and 70% of surveyed institutional investors believe factor investing can be extended to the asset class.

      As solutions continue to evolve, factor products could become the foundation of many investors’ portfolios.

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Markets

Ranked: The World’s Most Downloaded Apps

The app economy is expected to be over $6 trillion by 2021—see the world’s most downloaded apps and how they’re driving the future of this market.

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Ranked: The World’s Most Downloaded Apps

From strategically finding love, to helping researchers search for extraterrestrial life—there is quite literally an app for almost anything these days.

It is therefore no surprise that apps have become one of the largest consumer ecosystems on the planet, with the global app economy expected to reach $6.3 trillion by 2021.

Today’s graphics pull data from a recent report by Sensor Tower that ranks the top 20 most downloaded apps of 2019. New entrants are rising up and threatening the dominance of more established tech companies—but can they sustain their current position on the leaderboard?

The Champions of the App Economy

According to the report, total app downloads grew to 115 billion in 2019, including almost 31 billion downloads on the App Store and 84 billion on Google Play.

Social media giant Facebook owns four out of five of 2019’s most downloaded apps: Facebook, Facebook Messenger, WhatsApp, and Instagram. Collectively, they boast an eye-watering 16 billion downloads—with WhatsApp holding the top spot for the fourth year running.

Growth in the short-form video category is apparent. The video creation app Likee joined this year’s ranking and sits in sixth place, with the majority of the app’s 330 million downloads coming from India.

The app lets users edit videos using a wide variety of effects, and directly competes with TikTok—a lip syncing app that entered the ranking in 2018 and now threatens WhatsApp’s position at the top of the leaderboard.

Which Apps Are Climbing the Ranks?

TikTok is the newest platform to turn its users into viral sensations, grossing $177 million in 2019. This is equal to more than five times its 2018 revenue. TikTok also bypassed Instagram in 2018, breaking Facebook’s foothold on the top four apps globally.

Most downloaded apps rank

TikTok is owned by Chinese tech firm ByteDance, the most valuable private company in the world—and 78% of TikTok’s total Q4’2019 revenue came from its native country.

Aside from several short-form video entrants, new players from other industries continue to storm up the ranks. While they don’t make the list of most downloaded apps yet, their recent success could change that.

Streaming Services

Netflix is the only streaming service to make it into the top 20 most downloaded apps, but the launch of Disney+ could potentially change that.

Despite a November launch, Disney+ became the second most popular new app of 2019. Within a month, the service generated $50 million in revenue.

To put this into context, Disney+ acquired 34% of all streaming app downloads in less than three months, or 30 million subscribers—half of Netflix’s current 60 million U.S. subscribers. That figure also surpasses Hulu and Amazon Prime’s figures for the entirety of 2019.

Gaming

With 2.4 billion people playing mobile games in 2019, gaming is also set to become a major player in the app economy.

Two popular console franchises, Call of Duty and Mario Kart, recently entered the mobile market to become two of the most successful games in the category.

The free mobile version of Call of Duty had the second best quarter of any mobile game ever, with 170 million worldwide downloads. Only Pokémon GO had a better quarter, with more than 300 million installs when it launched in 2016.

The success of these apps can be attributed to their already established consumer base, and the evident shift in more gamers moving to mobile platforms as smartphone technology and processing speeds improve.

Countries Leading the App Economy

The app economy is also being fueled by growth in emerging markets including China, India, Brazil and Russia, thanks to faster internet speeds and increasing smartphone adoption rates.

Specifically, India’s increasing digitization is driving significant growth in the market. The country witnessed nearly 5 billion app installs in the last quarter of 2019—surging ahead of the U.S. with just over 3 billion installs.

app downloads by country
Note: As Google Play is not available in China, the country was excluded from this chart.

India’s demand could be attributed to the fact that half of its 1.3 billion population is under the age of 25. A younger, tech savvy audience has resulted in India becoming TikTok’s top market, commanding 45% of the app’s first time downloads in 2019.

The App Economy 2.0

With an explosion in user spending, and seemingly endless opportunities for innovation, the global app economy shows a tremendous amount of promise, but is still in its early days.

Consumers spent $101 billion on apps globally in 2018. This is double the size of the global sneaker market, and nearly three times the size of the oral care industry.

—Danielle Levitas, EVP of Global Marketing & Market Insights at App Annie

Rising consumer spend combined with other forms of monetization, such as advertising and mobile commerce, could soon enable the app market to surpass the trillion dollar barrier in revenue.

While many experts claimed that the app industry was dead in its tracks, it’s safe to say that those predictions are now being irrefutably challenged.

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