During 2023 thus far, CROBEX10 and S&P500 recorded solid returns, at 29% and 18%, respectively. However, if we were to look at the correlation between the returns, it was basically at 0, meaning there was no correlation between the returns of these 2 indices. In this overview, we’ll look at how these indices developed, what’s driving them, and despite their size differences, what are they similar in.

In 2023 so far, both CROBEX10 and S&P500 managed to record solid recovery, and even growth in the face of the uncertain macroeconomic situation, high interest rates and inflation, and elevated risk of geopolitical escalation. S&P500 reached its all-time-high value of 4,796 points back at the beginning of 2022, with the 18% return recorded in 2023 YTD leading to 4,550 points, or 95% of that level.

The situation for CROBEX10 is even better, as it managed to reach its all-time-high value back in September 2023, at 1,513 points, and due to further strong performance by several shares, in 2023 YTD it managed to achieve overall growth of 29%, leading to the current 1,496 points, or 99% of its all-time high value.

Share price development of S&P500 and CROBEX10 (2023 YTD, %)

Source: Bloomberg, InterCapital Research

This growth was, to say the least, unexpected given the situation in the world right now. Now even though both indices gave solid returns in 2023, the correlation between them was almost 0 in 2023, while historically (since 2010), it stood at 0.26, which by itself is also a low correlation. In other words, even though both indices are affected by the same market forces driving sentiment, such as wars, the pandemic, crises across the world, and the latest, elevated inflation and interest rates, they basically operate “on their own” as compared to each other.

Share price development of S&P500 and CROBEX10 (2010 – 2023 YTD, %)

Source: Bloomberg, InterCapital Research

The American capital market is of course incomparable to the Croatian one, in every possible metric. A lot more investments are made into it, and as such it has managed to achieve a 3.7x return since 2010, while CROBEX10 managed to achieve “only” a return of 1.6x. Of course, the Croatian equity market was marred by specific Croatian conditions, such as the delisting of many shares in the past decade from the exchange, the financial crisis that ran until 2015, and the Agrokor crisis, among many others.

Despite this, some things tie both of the indices together. Even though the S&P500 is a much wider index, comprised of 500 companies, 2023 has been a specific year where only several shares drove index returns. This of course is not because other companies didn’t perform, but mostly due to the weightings of larger companies (such as Apple, Nvidia, Alphabet, Amazon, etc.) in the index. Despite CROBEX10 having only 10 companies in the index, a similar situation has happened.

Weighted returns of CROBEX10 constituents in 2023 (p.p. contribution to the overall percentage index return, 2023 YTD)

Source: Bloomberg, InterCapital Research

Weighted returns of select S&P500 constituents in 2023 (p.p. contribution to the overall percentage index return, 2023 YTD)

Source: Bloomberg, InterCapital Research

It should first be noted that we included only companies with >1% weight in the S&P500 index, as the smaller weighted companies would inevitably contribute less to change in the index. Even so, when we combine the 16 observed companies, they make up app. 37.6% of the entire index. In terms of their performance, combined these 16 companies gave a return of 24.2%, above S&P500’s 18.5%. In other words, 16 companies out of 500 contributed a return of 24.2% to the index, while all remaining companies combined gave a negative return of 5.7%. Talk about the S&P500 being a “wide” index and a measure of the performance of the “entire” American economy.

If we were to look at just the top 5 companies in terms of weights, they gave a return of 18.9%, meaning that all other companies combined gave a return of -0.5%! For CROBEX10, a similar situation is present. The largest contribution came from Podravka, which recorded 88% return YTD, thus contributing 18% to the overall index growth. Following them there is Končar at 9.6%, HT at 2.5%, HPB at 2.4%, and Atlantic Grupa, at 2.3%. Combined, all the 10 companies gave a return of 36.1%, and the difference to CROBEX10’s 29% return is due to index changes (for example, Arena Hospitality Group and AD Plastik were excluded from the index this year, while Span and HPB were included). Even so, we can again see a concentration of returns in the largest companies.

In this sense, both S&P500 and CROBEX10 were similar, even though on most other metrics they’re in different dimensions. Now the question remains, how did these returns happen this year? 2023 by its characteristics seemed like a year where returns would be suppressed, or even negative, if we take everything that is happening right now. Furthermore, one could easily argue that economies around the world were in better shape in the last couple of years than they are now. One way that this could be explained is the volatility, which for the S&P500 can be measured by looking at the Volatility Index, or VIX. In short, this index measures the volatility of options on the S&P500 and thus can be a “forward” looking indicator of the sentiment on the market.

VIX index development (2010 – 2023 YTD, %)

Source: Bloomberg, InterCapital Research

VIX currently stands at 13.3 points, which is close to its all-time low. For comparison sake, after the invasion of Ukraine, the index jumped to over 30 points, while an even more significant jump was recorded back in March 2020, at over 82 points when the COVID-19 lockdowns and restrictions started being implemented. Now it seems that the sentiment is a lot more subdued.

One of the main reasons why this could be happening is investor fatigue. If you read any of the news for the last 2 years, it has been full of negative news regarding markets, countries, and general policies (e.g. interest rate hikes). As this continued for a prolonged period, it almost seems that investors are “numb” to the new developments, and even announcements regarding something that would have caused a market dip before don’t contribute to a market decline right now.

Combined with the hope that the situation is going to get better, with examples being the possibility of several interest rate cuts already in 2024, it isn’t hard to imagine why the sentiment is hopeful, despite all that has happened. A similar trend can be noted in Croatia, with several companies recording really strong growth that wouldn’t be expected in years when everything is going well, let alone in a year like this.

So to end this, despite the difference in size, composition, and basically all other metrics, a similar trend is happening to both S&P500 and CROBEX10, that of recovery and hope. If this trend continues going forward, then this might be one of the rare times when in the midst of elevated inflation and high interest rates, geopolitical machinations, the equity markets are reaching their all-time high. Something unimaginable just a couple of years ago!