CFA/ICAI Event – ‘Rethinking Financial Services for Millennials’ to be held on 21st April, 5:30 p.m. – FREE Registration

On behalf of CFA Society India, it is my great pleasure to invite my friends in Mumbai to our Putting Investors First (PIF) event ‘Rethinking Financial Services for Millennials’ to be held on 21st April, 5:30 p.m. onwards at the ICAI auditorium, Bandra Kurla Complex, Mumbai Click here for more details For registrations:


Biharilal Deora, CFA,

PIF Flyer w.o keynote-1.o keynote-1.o keynote-1.pdf

Market outlook – April 2017 by Navneet Munot

From: Navneet Munot
Sent: Monday, April 3, 2017 8:32 PM
To: All SBIFM Users
Subject: Market outlook

Please find attached herewith our monthly “Market Outlook”.



Navneet Munot, CFA

Chief Investment Officer

SBI Funds Management Private Limited
(A Joint Venture between State Bank of India & Amundi Asset Management)
9th Floor, Crescenzo,

G Block, Bandra Kurla Complex

Mumbai 400 051

April 2017.pdf

Market outlook by Navneet Munot CFA

Attached herewith is our monthly “Market outlook”.



Navneet Munot, CFA

Chief Investment Officer

SBI Funds Management Private Limited
(A Joint Venture between State Bank of India & Amundi Asset Management)
9th Floor, Crescenzo,

G Block, Bandra Kurla Complex

Mumbai 400 051

March 2017.pdf

On the Trump Rally; Animal Protein Versus Plant Protein!

From: aditya rana
Date: Sat, Feb 25, 2017 at 1:08 PM
Subject: On the Trump Rally; Animal Protein Versus Plant Protein!


The election of Donald Trump as president of the US has certainly kindled the market spirits – with the S&P 500 index up nearly 10% from its November lows, strong fourth-quarter corporate earnings and a surge in multiple business and investor sentiment surveys. While a “sugar-high” is certainly possible in the first year or two of the presidency, it is also important to keep a focus on the medium to longer term horizon, which does not bode well for the US economy, and by implication its stock market which is already trading at inflated levels. John Ross, senior fellow at Renmin University wrote an interesting piece on the longer-term outlook for the US economy. To summarise:

-The US is likely to experience a short-term acceleration of growth, following a 2016 growth rate which was significantly below its long-term trend. However, the long-term growth rate is unlikely to move higher without fundamental changes to the economy which are unlikely under the Trump presidency.

-Looking at the long-term trend in the growth rate of the US economy, by using a 20-year moving average to smooth out fluctuations due to the business cycle, the data clearly shows a slowing economy over 50 years (see chart below) , with successively lower peaks – 4.9% in 1969, 4.1% in 1978 , 3.5% in 2003 to a current level of 2.3%.

-Looking at the short-term fluctuations in US growth versus its long-term average (see chart below), as of the 3rd quarter 2016 the latest growth rate of the US economy was only 1.7% which was significantly below its long term trend. This makes it likely that growth will bounce back in 2017/2018 leading to the illusion that “Trump is improving the economy”.

-Analysing the reasons underlying the long-term slowdown of the US economy, at the basic fundamental level it has to do with the rate of capital accumulation in the economy – when the rate of capital accumulation is high the economy grows rapidly, when the rate of capital accumulation is low the economy slows down.

-Net capital accumulation is equivalent to net savings in an economy, and looking at the US savings/capital accumulation rate since 1929 (see chart below):

-During the beginning phase of the Great Depression (1929-1933), US capital accumulation was negative with an associated significant economic slowdown. Subsequently, US savings/captal accumulation rose during WW II and finally peaked in 1965 with an associated economic boom.

-After 1965, US saving/capital accumulation has been falling steadily until it became negative again during the Great Recession of 2008-2009. This long term trend explains the declining long-term trend in US growth.

-It is threfore clear, that Trump would have to increase the rate of capital accumulation to accelerate the long-term growth trend of the US economy, and without such a sharp rise in the rate of capital accumulation, the US economy is very unlikely to sustain a higher than the long-term average growth rate.

-However, an economy’s savings rate comprises the sum of household savings, corporate savings and government savings – and government savings in the US and most other economies are negative due to budget deficits. In addition, Trump has announced plans to introduce tax cuts and increased military spending, which will only increase the budget deficit further thereby reducing the savings rate in the economy as a whole.

-In the short-term the US could offset the low savings rate by borrowing from overseas which could boost economic growth temporarily. But historical experience shows that it’s domestic capital creation which is key to produce long term economic growth. So going forward, the key variable to monitor for the US economy is whether capital accumulation/savings is rising or falling.

Update based on latest US GDP data:

-The latest data shows that US GDP growth fell from 2.6% in 2015 to only 1.6% in 2016 – a decline of almost 40%. In addition, US per capita GDP growth fell fom 1.9% in 2015 to 0.9% in 2016 – a fall of just over 50%!

-This poor performance of the US economy is all the more stark when compared to the EU and China – the US was the slowest growing (1.6%), versus the EU (1.9%-projected as the latest data is not out) and China (6.7%).

-Of course the Western media played up the risks of a “hard landing” in China and “strong recovery” in the US. Yes- the Chinese economy did slow from 6.9% to 6.7% from 2015 to 2016, but the US underwent a major slowdown.

As argued in last week’s newsletter, EM countries like China offer significantly better long-term economic and stock markets prospects than developed markets like the the US. The 2010-2014 economic and stock market slowdown in EM is clearly over, and EM markets are currently in the early phase of a cyclical upturn. As the attached graph from Blackrock illustrates, EM, Japan and European corporate earnings are enojoying a robust rebound, outperforming the US by a wide margin.

-Looking ahead on a longer term basis, as Templeton points out – EM currently represent 10% of the world’s stock market-capitalization but global investors have much lower amounts allocated to EM – creating the potential for more upside as allocations rise to appropriate levels. In addition, EM represent 50% of the world’s GDP when measured in nominal terms and nearly 60% using PPP, and account for 80% of world growth which will result in a higher EM percentage of world stock-market capitalization in the future.

-Investors are also largely unaware of the strcutural changes going on in the EM world – over the last three decades emerging markets have fuelled their growth through exports – with commodities being a major component. However, commodity stocks have declined from 50% of the MSCI index in 2008 to 15% today. In addition, the index is increasingly geared towards the high growth IT and consumer sectors – which have each risen from 7% of the index in 2008 to 24% for IT and 17% for consumer stocks today. EM are no longer mainly a commodity play.

Animal protein versus Plant Protein:

-An interesting study conducted by the Massachusetts General Hospital showing a higher mortality rate from the intake of higher animal protein and a lower mortality rate from the intake of plant proteins.

Massachusetts General Hospital, August 1, 2016

-The largest study to examine the effects of different sources of dietary protein found that a high intake of proteins from animal sources — particularly processed and unprocessed red meats — was associated with a higher mortality rate, while a high intake of protein from plant sources was associated with a lower risk of death. Results from the study — which analyzed data from two long-term epidemiologic studies — appears in the August 1 issue of JAMA Internal Medicine.

-"Overall, our findings support the importance of the sources of dietary protein for long-term health outcomes. While previous studies have primarily focused on the overall amount of protein intake — which is important — from a broad dietary perspective, the particular foods that people consume to get protein are equally important. Our findings also have public health implications and can help refine current dietary recommendations about protein intake, in light of the fact that it is not only the amount of protein but the specific food sources that is critical for long-term health,” said the lead researcher of the study.

-While several studies have suggesting that substituting proteins for carbohydrates in the diet has several health benefits — including weight management, reducing blood pressure and other cardiovascular risk factors — the authors note, few studies have examined the specific sources of protein. Those that have were relatively small and based on one-time assessment of participants’ diets. The current study analyzes data from the Nurses’ Health Study (NHS) and the Health Professionals Follow-up Study (HPFS), which have compiled comprehensive health data on more than 170,000 participants since the 1980s.

-The researchers analyzed more than 30 years of data for NHS participants and 26 years of data for HPFS participants, totaling more than 3.5 million person-years. During those time periods more than 36,000 deaths were documented among study participants — almost 9,000 from cardiovascular disease, around 13,000 from cancer and about 14,000 from other causes. After adjustment for lifestyle and other dietary risk factors, a high consumption of protein from animal sources — any types of meat, eggs or dairy — was weakly associated with an increased rate of death, while high consumption of protein from plant sources — breads, cereals, pasta, beans, nuts and legumes — was associated with a lower mortality rate.

-More careful analysis revealed that the association of animal protein intake with an elevated mortality risk only applied to participants with at least one factor associated with an unhealthy lifestyle — being either obese or underweight, heavy alcohol consumption, a history of smoking, or physical inactivity. In fact, the association disappeared in participants with a healthy lifestyle. Analysis based on specific sources of protein indicated that the animal-protein-associated mortality risk applied primarily to processed and unprocessed red meats, which include both beef and pork products, and not to protein from fish or poultry.

-"While we expected we might find the associations to be weaker in the healthy lifestyle group, we did not expect them to completely disappear. But when we looked deeper into the data, we found that — at similar levels of animal protein intake — those in the unhealthy lifestyle group consumed more red meats, eggs and high-fat dairy, while the healthy lifestyle group consumed more fish and poultry. So we suspect the different sources of animal protein between the two groups may contribute to the stronger results in the unhealthy lifestyle group," said the lead reseracher.

-He adds, "Our findings suggest that people should consider eating more plant proteins than animal proteins, and when they do choose among sources of animal protein, fish and chicken are probably better choices. Future studies should examine the mechanisms underlying the different effects of plant and animal proteins — along with different sources of animal proteins — on overall health."

Here’s to replacing animal proteins with plant proteins in your diet!



On The Bullish Case for China; Why All Types of Saturated Fat Increase the Risk of Heart Disease!

From: aditya rana
Date: Sat, Feb 18, 2017 at 1:38 PM
Subject: On The Bullish Case for China; Why All Types of Saturated Fat Increase the Risk of Heart Disease!


A longer-term focus is of paramount importance for investors, so as not to be swayed by temporary market swings and allowing the fundamental factors supporting a particular investment thesis to play out. Morgan Stanley published an interesting research piece this past week titled “Why we are Bullish on China” which takes a long term view on China’s growth story, analysing its prospects and challenges, and why the MSCI China stock index is likely to continue its outperformance against the broader EM index. Some key highlights:

-The challenges facing China have been well publicised in recent years – a high debt to GDP ratio, excess capacity, over-reliance on investment to drive growth and increasing protectionism. Global investors fear that China could have a major financial shock, like the US is 2008 and Asian EMs in 1997, and are significantly underweight Chinese equities relative to the benchmark (see chart below).

-Morgan Stanley takes a positive view that China will be able to surmount these challenges based on :

1) The risks of a financial shock are low: a) as the debt has been funded by domestic savings and used for investment rather than consumption; b)China has a strong net asset position (and a positive net international investment position of 15% of GDP) which provides a buffer against shocks; c) a current surplus, high FX reserves and lack of high inflationary pressures allowing China to manage domestic liquidity conditions. However, high debt levels reflect borrowing from the future which implies lower growth in the future.

2) Despite lower growth in the years ahead, China is likely to reach high income status (defined as per capita income of $12,500) by 2027 from the current level of $8,100. Only 19 countries have been able to achieve this status over the last 30 years, with Korea and Poland being the only two with populations over 20 million.

-To achieve the above goal, China would need to focus on the following two factors:

1) Manage the debt cycle prudently and allow the economy to grow at its potential rather than at an unsustainable target. Policy makers seemed to have accepted lower growth rates, and have shifted focus on preventing financial risks and asset bubbles. Deflation risks are receding with policy makers directing lower investment in areas with excess capacity, shutting down unviable businesses and a recovery in external demand. Slower growth with easing of disinflationary pressures will reduce the pace of increase in the debt/GDP ratio.

-2) Policy makers will need to implement significant structural reforms in the form of a shift in focus towards consumption and services, further development of the high-value added manufacturing sector, reform of state-owned enterprises (SOEs) and cutting excess capacity.

-China has made significant progress in reorienting its economy towards consumption, which is expected to double over the next decade- rising from $4.4 trillion in 2016 to $ 9.7tn by 2030. China is already the world’s biggest consumer market in various areas (autos, mobile phones, on-line retail) and domestic players are driving the rapid growth is areas like sportswear, cosmetics, budget airlines and hotels.

-Mirroring the shift towards consumption, the service sector is expected to rise to 60% of GDP by 2030, from the current levels of 52%. The growth opportunities are likely to come from areas like business services, real estate, health care, education and personal services.

-Chinese firms are already formidable competitors in heavy industry sectors like telecom equipment, power infrastructure , railway infrastructure and ship construction. Levering the huge size of its domestic market, local firms have a dominant market share in areas like PCs and smartphones. The share of value-added exports has been steadily increasing and now accounts for over half of exports, with good progress made in medium to high technology areas like transistors and LCD screens.

-Reform of the SOE sector is paramount given the high leverage ratios and low ROAs and ROEs levels. Policy makers are focussed on reforms to improve performance – by strengthening the largest SOEs as “national champions”. Progress is also being made in reducing excess capacity in certain areas – with the steel and paper sectors likely being the most successful in reducing capacity.

-Chinese private firms already dominate the MSCI China index in areas like IT, consumer and healthcare sectors, and generate far higher returns than their SOE peers, and could reach 70% of the MSCI China index by 2020.

-Implication of China’s rise to high income status for the world economy:

-China’s move towards high income status will have profound implication for the world – with sectorss benefiting from the growth of domestic consumption and services fuelling opportunities for foreign firms in areas like tourism, healthcare and leisure services. At the same time, a move into higher value-added manufacturing areas, leveraging its huge domestic market and funding capacity for R&D will increasingly pose a threat to upstream manufacturing economies like Korea, Japan, Taiwan and Germany (see chart below).

-Domestic champions like Alibaba, Sinopec, Huawei and Fosun are well on their way to being global multinational companies, while companies like Tencent, Baosteel and Sinopharm have the capability to compete globally. These domestic champions and MNCs are having a significant impact on the overall economy through productivity gains, which will be a key to China’s long term development (see chart below).

-Implications for the stock market:

-If China is able to achieve high income-status in the next decade, it is very likely that MSCI China will continue its outperformance over MSCI EM – which has been 3.0% per annum over the last 15 years (even more against the S&P 500) resulting in a compounded return of 13% per annum versus 10% for MSCI EM (see chart below).

-With the ongoing transition of the Chinese economy, it is recommended to continue being overweight the “new economy” (IT, consumer and healthcare) versus the “old economy” sectors like energy, materials and industrials (see chart below).

-MSCI China has relatively attractive valuations when compared to EM, with a ROE (11.9%) which is 1.5% higher than that of MSCI EM, while its PBV multiple is almost exactly the same (see chart below). In addition, global investors are also about 5.0% underweight Chinese stocks which is close to an all-time low providing room for higher allocations if the investment thesis plays out.

-The onshore Shanghai (+38% from current levels) and Shenzhen markets are also expected to enter a new bull market driven by: a) improved earnings growth (+6%) , P/E ratios increasing to 22x (from 18x currently and a peak of 25x in mid-2015 – see first chart below); investor flows shifting into equities from property with property control measures taking effect (see second chart below).

A well analysed and persuasive case for adding China as a core long term position to a globally diversified portfolio – both from a short-to-medium term perspective (1-3yrs) as well as a long term perspective (10yrs+). There are various ETFs which give exposure to the MSCI global China index (MCHI, CN), China offshore internet (KWEB), Shanghai & Shenzhen CSI 300 index (ASHR), domestic small caps (ASHS), domestic tech (CNXT) and Chinese H shares listed in Hong Kong (2828).

Saturated fat, regardless of type, linked with increased heart disease risk:

An interesting note from Harvard University on new research which illustrates the dangers of saturated fat from all sources – included “healthy” oils like coconut oil:

Harvard School of Public Health, Dec, 2016:

-A study published in the November issue of the British Medical Journal revealed findings that, at first glance, are not that surprising: saturated fat in the diet is associated with an increased risk of heart disease. (1) However, the study offers a unique twist by teasing out the effects of different types of saturated fatty acids (SFAs). Recent articles have attempted to exonerate saturated fat from its long time connection with heart disease, questioning if certain types of SFAs may have a weaker effect on raising blood cholesterol.

-Butter, cheese, red meat, and full-fat dairy are high in saturated fat. Some plant-based fats like coconut and palm oil are also rich in saturated fat. However, all of these foods differ slightly in their relative proportions of individual SFAs. Commonly eaten SFAs include lauric, myristic, palmitic, and stearic. Coconut oil is richest in lauric acid, whereas butter is highest in palmitic acid; both contain smaller amounts of the other fatty acids.

-The BMJ study examined the associations of individual and combined SFA intake with heart disease risk in more than 73,000 women from the Nurses’ Health Study and 42,000 men from the Health Professionals Follow-Up Study. Additionally, the researchers estimated the effects of replacing 1% of daily calories from these fatty acids with the same amount of calories from polyunsaturated fat, monounsaturated fat, whole grain carbohydrates, and plant proteins. There was an 18% greater risk of heart disease in the group consuming the highest amounts of SFAs compared with the group consuming the least, with palmitic acid and stearic acid showing the highest risk. When replacing intake of individual SFAs, the greatest risk reduction was seen when replacing palmitic acid (found in palm oil, fatty cuts of red meat, and dairy fat) with plant proteins or polyunsaturated fat, with an 11% and 12% risk reduction, respectively.

-In the US diet, these SFAs are from some common food sources, such as full-fat dairy, red meats, animal fats, and tropical oils. Therefore, people can lower their intake of these individual SFAs by reducing consumption of those foods high in saturated fats. Our data showed the benefits of switching from saturated fats to healthy polyunsaturated fats, whole grain carbohydrates, and plant-based proteins.

-In diets of the participants, intake of lauric acid was much lower than palmitic acid and stearic acid. This could be the primary reason that they observe clear associations for this SFA. In other clinical trials, the effects of lauric acid on raising LDL are the strongest. Therefore, although small amounts of coconut oil are unlikely to be a problem, it is not desirable to include tropical oils such as coconut oil as a primary source of dietary fat.

Here’s to reducing the intake of saturated fats by cutting down animal protein, dairy, tropical oils and replacing them with plants, whole grains, healthy oils and fruits!



On the Retreat of Multinational Companies; What Not to Add to White Rice, Potatoes, or Pasta!

From: aditya rana
Date: Sat, Feb 11, 2017 at 1:50 PM
Subject: On the Retreat of Multinational Companies; What Not to Add to White Rice, Potatoes, or Pasta!


The performance of global markets so far this year stands in stark contrast to the situation least year, with the MSCI world index posting a rise of 4.2% (compared to -6% at January-end last year), led by emerging markets (+7.9%) with the US (+3.9%), Japan (+4.4%) and Europe (2.4%) all putting in decent numbers. The standout performers continue to be Argentina (+27%) and Brazil (+14.4%), with Asia led by China (+9.4%) and India (+9%) – all MSCI returns in US$s.

Turning to the longer term outlook, a key theme put forward by this letter over the years is the rise of local EM companies, at the expense of the global multinationals. In 2006, the consulting firm BCG had issued a fascinating report on the rise of EM companies, identifying 193 “challengers” which would compete with the established multinationals going forward. In July 2016, they issued an update on this theme (summarised in the July 2, 2016 newsletter) and demonstrated the success of these challengers in terms of market share, revenue growth and significant stock market outperformance. They also identified 1,500 fast growing “new champions” which are now expect to take the lead in the coming years. It was therefore interesting to see that The Economist has picked-up on (and broadened it to all global versus local firms) theme in their latest issue with a report titled “The Retreat of the Global Company”. To summarise:

-Multinationals (with 30% of their sales outside their home region) have dominated the global economy since the late-eighties – by directing the flow of goods, services and capital – theycontrol supply chains accounting for over 50% of world trade, represent 40% of the value of the developed world’s stock market, and own most of the world’s intellectual property, while accounting for only 2% of the world’s jobs.

-With their desire to internationalising their customers, production, capital and management, these companies drove the stupendous 85% rise in the global stock of cross-border investment since 1990 (see chart 1 below).

-In 2006, the head of IBM proclaimed the arrival of the ”globally integrated enterprise” run as a unitary organisation (rather than a federation) “ integrating production and value delivery worldwide”. However, an increasing body of evidence shows that this era is now ending– in 2016 multinational cross-border investment fell by 10-15% , and the share of trade accounted by cross-border supply chains has stagnated since 2007. In addition, the proportion of sales made by DM firms outside their home region has fallen, with profits declining and the flow of new investment as a % of GDP shrinking (see chart 2 below).

-To understand this paradigm shift we have to analyse the three constituencies which have driven the previous era: 1) investors, 2) “headquarter countries” where the multinationals are domiciled, and 3) “host countries” which received the investments.

-Investors saw a huge potential beginning in the early nineties as China, India and the Soviet Union opened up and Europe liberalised itself into a single market allowing multinational firm to exploit the growing market and improve efficiency by accessing management, capital, brands and technology from the DM world and cheap labour and raw materials (with lighter rules on pollution) from the EM world.

-However, this growth phase has now ended, with the profits of the top 700-odd multinational firms from the DM world dropping by 25% over the last five years. The strength of the dollar explains only about a third of the fall. Meanwhile, the profits of domestic firms has risen by 2%.

-The return on equity (ROE) of the top 700 multinationals has also dropped from a peak of 18% a decade ago to 11% today. For the biggest three countries hosting multinationals – the US, UK and the Netherlands, the ROE on foreign investments has also shrunk by 4-8% (see chart 3 below). Multinationals based in the EM world have also fared poorly, with a worldwide ROE of 8%, with many high profile cross-border acquisitions floundering (e.g. Lenovo purchase of IBM’s PC business).

– About half the decline in profits of multinationals has been due to the slump in commodity prices (affecting oil, mining and related firms) and another 10% is due to banks. Profits at trading and shipping firms which have benefited from globalisation has fallen dramatically (50% from their peak in some cases).

-The decline in profits extends beyond these core industries, with half of all big multinationals seeing their ROE fall over the past three years, and 40% failing to make an ROE of over the benchmark value adding rate of 10%. In six of the ten sectors multinationals have lower ROEs than their local counterparts (see chart 4 below). Even stalwarts like GE and P&G have seen their profits decline by 25% from their peak. The only industry to buck the trend has been technology, where foreign profits comprise 46% of total foreign earnings of the top 50 US multinationals, up from 17% a decade ago.

-The underlying factor behind this shift is that the advantages of scale and arbitrage have disappeared – global firms have big overheads, complex supply chains tie up inventory and sprawling firms are hard to run. Some of the traditional arbitrage opportunities have declined with rising wages in China and limited scope for further tax arbitrage. Lastly, the free flow of information implies that competitors in local markets can catch-up quickly.

-Firms with a domestic focus are winning market share from multinationals – examples include local banks in Brazil, domestic mobile operators in India, shale firms in the US and local dumpling brands in China. This has resulted in the multinationals’ share of global profits declining from a peak of 35% a decade ago to 30% today.

-The second factor behind this paradigm shift has been that the headquarter countries, which previously viewed them to be champions of growth and efficiency, now see them as agents of inequality. Between 2009 and 2013, only 5% of the net jobs added in the US were created by the multinationals. In addition, the profits of their intellectual property accrued to a wealthy shareholder elite. As a result the framework aiding the growth of the these firms is eroding – global accounting, antitrust, money-laundering and bank capital rules are being localised into US and European camps, takeover of western firms now have strings attached to safeguard local jobs, trade deals like TPP and TTIP which protected intellectual property are floundering and global tribunals previously used to bypass local courts are now under attack.

-With the shifting political landscape in the DM world tightening rules in favour of domestic workers (with higher wages) , higher taxes for overseas production, closing of tax loopholes and implementing border taxes – multinational profits in the DM world are likely to decline further. For example, if US firms shifted a quarter of their jobs back, and paid the same tax rate abroad as at home, their profits will fall by another 12%. This excludes the cost of building a plant in the US.

-By contrast, the “host countries” which receive investment by the multinationals remain relatively enthusiastic. China, where by 2010, 30% of industrial output and 50% of exports was produced by subsidiaries or JVs, remains attractive. Examples include Argentina, Mexico and India which are trying to attract more multinational firms and their supply chains. However, the trend here is also changing with China leading the way by pushing for “indigenous innovation” – i.e. more local sourcing of products, transfer of intellectual property and making strategic industries like the internet out of bounds for foreign investment. Fears exist that other EM countries will follow the lead of China.

-Additionally, host countries are increasingly uncomfortable with the shift in business of the multinationals towards intangible services. For the top 50 US firms, 65% of foreign profits now comes from industries reliant on intellectual property such as technology, drug patents and finance compared to 35% a decade ago. In addition, there is diminished appetite amongst multinationals to relocate manufacturing production to the EM world like they did in China – in 2000 every billion dollars of foreign investment created 7,000 jobs and $600m of annual exports- it is now 3,000 jobs and $300m of exports.

-US technology firms are now facing local resistance – in 2016 Uber sold its Chinese operations to a local rival after a fractious battle. In December, India’s two biggest digital champions Ola and Flipkart, argued that the government should protect them against foreign companies like Uber and Amazon which would build monopolies, create few jobs and remit their profits back home.

-The future of global business is likely to still have some areas of growth: 1) a smaller top tier of multinationals which localise production, supply chains and management (i.e. GE, Emerson, Siemens); 2) a small sliver of global digital and intellectual-property firms like Google, Netflix, drug companies and other firms which use franchising deals with local firms as a cheap way to maintain a global footprint. However, given that they create few jobs, involve oligopolies and do not benefit from the protection of global trade rules (which apply to manufacturing) they will be vulnerable to nationalist pressures; 3) the most interesting area- small firms using e-commerce to buy and sell on a global scale. Up to 10% of the 30m or so US firms already do this to some extent– Paypal says its cross-border transactions are at $80BN a year and growing rapidly.

-The changing nature of global business will have important implications – investors, who have a third or more of their equity investments in multinationals could face an era of even lower returns, countries which rely on income from foreign investments, or capital flows from new ones, could suffer – the collapse in profits of UK multinationals is the main reason behind the deterioration in the UK’s balance of payments. Of the 15 countries with current-account deficits of over 2.5% of GDP in 2015, 11 depended on new multinational investments to bridge a third of the gap. The result will be a more fragmented and parochial form of capitalism – less efficient but with wider and more sustainable political support.

Fascinating report which ties well into the theme of investing in small-cap companies in the EM as well as the DM world. As BCG had argued persuasively in their report, the 1,500 “new challengers” from the EM world is likely to be the main growth engine of the global business scene in the coming years. Stay invested in this sector of the EM (and DM) world through mid-cap/small cap funds and ETFs.

What Not to Add to White Rice, Potatoes, or Pasta:

-An interesting note from Dr. Greger on the adverse effects of adding meat to refined grains like white rice and pasta.

Michael Greger M.D., February 2nd, 2017

-Rice currently feeds almost half the human population, making it the single most important staple food in the world, but a meta-analysis of seven cohort studies following 350,000 people for up to 20 years found that higher consumption of white rice was associated with a significantly increased risk of type 2 diabetes, especially in Asian populations. They estimated each serving per day of white rice was associated with an 11% increase in risk of diabetes. This could explain why China has almost the same diabetes rates as we do.

-Diabetes rates in China are at about 10%; we’re at about 11%, despite seven times less obesity in China. Japan has eight times less obesity than we do, yet may have a higher incidence of newly diagnosed diabetes cases than we do—nine per a thousand compared to our eight. They’re skinnier and still may have more diabetes. Maybe it’s because of all the white rice they eat.

-Eating whole fruit is associated with lower risk of diabetes, whereas eating fruit processed into juice may not just be neutral, but actually increases diabetes risk. In the same way, eating whole grains, like whole wheat bread or brown rice is associated with lower risk of diabetes, whereas eating white rice, a processed grain, may not just be neutral, but actually increase diabetes risk.

-White rice consumption does not appear to be associated with increased risk of heart attack or stroke, though, which is a relief after an earlier study in China suggested a connection with stroke. But do we want to eat a food that’s just neutral regarding some of our leading causes of death, when we can eat whole foods that are associated with lower risk of diabetes, heart attack, stroke, and weight gain?

-If the modern diabetes epidemic in China and Japan has been linked to white rice consumption, how can we reconcile that with low diabetes rates just a few decades ago when they ate even more rice? If you look at the Cornell-Oxford-China Project, rural plant-based diets centred around rice were associated with relatively low risk of the so-called diseases of affluence, which includes diabetes. Maybe Asians just genetically don’t get the same blood sugar spike when they eat white rice? This is not the case; if anything people of Chinese ethnicity get higher blood sugar spikes.

-The rise in these diseases of affluence in China over the last half century has been blamed in part on the tripling of the consumption of animal source foods. The upsurge in diabetes has been most dramatic, and it’s mostly just happened over the last decade. That crazy 9.7% diabetes prevalence figure that rivals ours is new—they appeared to have one of the lowest diabetes rates in the world in the year 2000.

-So what happened to their diets in the last 20 years or so? Oil consumption went up 20%, pork consumption went up 40%, and rice consumption dropped about 30%. As diabetes rates were skyrocketing, rice consumption was going down, so maybe it’s the animal products and junk food that are the problem. Yes, brown rice is better than white rice, but to stop the mounting Asian epidemic, maybe we should focus on removing the cause—the toxic Western diet. That would be consistent with data showing animal protein and fat consumption associated with increased diabetes risk.

-But that doesn’t explain why the biggest recent studies in Japan and China associate white rice intake with diabetes. One possibility is that animal protein is making the rice worse. If you feed people mashed white potatoes, a high glycemic food like white rice, you can see in my video If White Rice is Linked to Diabetes, What About China? the level of insulin your pancreas has to pump out to keep your blood sugars in check. But what if you added some tuna fish? Tuna doesn’t have any carbs, sugar, or starch so it shouldn’t make a difference. Or maybe it would even lower the mashed potato spike by lowering the glycemic load of the whole meal? Instead you get twice the insulin spike. This also happens with white flour spaghetti versus white flour spaghetti with meat. The addition of animal protein makes the pancreas work twice as hard.

-You can do it with straight sugar water too. If you do a glucose challenge test to test for diabetes, where you drink a certain amount of sugar and add some meat, you get a much bigger spike than without meat. And the more meat you add, the worse it gets. Just adding a little meat to carbs doesn’t seem to do much, but once you get up to around a third of a chicken breast’s worth, you can elicit a significantly increased surge of insulin. This may help explain why those eating plant-based have such low diabetes rates, because animal protein can markedly potentiate the insulin secretion triggered by carbohydrate ingestion.

-The protein exacerbation of the effect of refined carbs could help explain the remarkable results achieved by Dr. Kempner with a don’t-try-this-at-home diet composed of mostly white rice and sugar. See my video, Kempner Rice Diet: Whipping Us Into Shape.

Here’s to adding mainly plant based foods to your grains – even if you cannot do without refined grains!



On the Great Rotation from Bonds to Stocks; China’s RMB Policy; Is it OK to Eat Butter?

From: aditya rana
Date: Sat, Jan 21, 2017 at 1:04 PM
Subject: On the Great Rotation from Bonds to Stocks; China’s RMB Policy; Is it OK to Eat Butter?


Global markets have continued their upward move this year, with the MSCI World index rising 2%, led by emerging markets (+3.5%) with Argentina (+18%) and Brazil (+9.0%) leading the charge. Is this momentum likely to continue as the year unfolds? Jeffrey Saut from the financial advisory firm Raymond James, and a 40-year veteran observer of markets, made some interesting observations in a recent note. To summarise:

-Market focus recently has been on the “Great Rotation” from bonds to stocks, following 30+ years of falling interest rates we are now reaching an inflection point which would herald an era of rising interest rates. The impact of this phenomena on markets is being widely debated, with one side arguing that it will unleash a massive flow of funds from bonds to stocks, while the other side holding the view that it will not have as big an effect on portfolio allocations as expected.

-The media has pitched the rate outlook as a battle between two bond gurus – Bill Gross and Jeffrey Gundlach. However, they are basically saying the same thing except for a minor difference in the key inflection points for rates – with Gross viewing it to be a 2.6% level on the 10-year Treasury and Gundlach at 3.0% (with a high certainty of it being breached this year).

-It is very likely that last July marked the bottom for rates, with the 10-year US Treasury breaching below its 2012 low, but subsequently rising by 125 basis points (a 100% move in percentage terms) by the end of 2016. While the long term trajectory does appear to be upward, the path is likely to be uncertain (just like the downward path over the last three decades was not straight down). While a simple long term chart of rates does show the downward trend being breached (see first chart below), a logarithmic (to account for the “base effect”) chart implies that a 3.5% level would need to be breached before a trend reversal is clear (see second chart below). These levels (2.6%, 3%, 3.5%) are likely to be strong resistance levels and rate could be range bound for the rest of 2017, until growth and inflation expectations pick up enough to cause rates to move much higher.

-The impact of rising rates on the stock market has sharply divided market opinion – on one end Charles Swab believing that the shift from bonds to equities over the past few months has added $3 trillion to equity values and educed bonds values by $2 trillion, and this shift has years to run. Meanwhile on the other end, Goldman believes that allocations of institutional investors to bonds are already at 30 year lows and there is limited room for further shifts due to mandate restrictions.

-The likely scenario is likely to lie somewhere in between these views. Rates are likely to remain low for the next several years making stocks relatively more attractive – and if earnings growth do pick-up (as they expect) during the course of the year leading to higher stock prices, retail investors are then likely to be enticed to chase prices upwards. At the same time, a big rotation from bonds to stocks is unlikely for the reason mentioned earlier. Ultimately earnings and economic growth will continue to be the main drivers for the stock and bond markets going forward.

-Markets are likely to have an upward bias this year, albeit with higher volatility given the policy uncertainty in the US and its impact on China and Europe. However, global economic activity is showing clear signs of stabilizing as evidenced from the chart below from Fulcrum below which track economic activity on a monthly basis. So stay long global equities in a diversified manner (with more weightage to EM) and use market pullbacks as buying opportunities.

-An ongoing concern about China is RMB depreciation and currency outflows. As the first chart below illustrates, the RMB has actually stabilized versus a basket of trade-weighted currencies since summer, and the depreciation versus the US$ is more about dollar strength than RMB weakness.

-FX outflows (reported as Yuan outflows – i.e. outflows arising from domestic conversion of Yuan into foreign currency) have also dropped to a trickle ($900mm) in December after a record outflow in September 2016 and a total of $310 billion for the year. It is likely that the Chinese government will continue to impose more capital restrictions if outflows accelerate again.

Is it OK to eat Butter?

Recent news in the media have highlighted a study demonstrating that butter (and other dairy products) are healthy foods. Dr. David Katz, Director of the Yale University Prevention Centre and founder of the True Health Initiative, looks at this in more detail to clear the air on the media hype.

-A PLoS ONE study examined data from several studies examining links between butter consumption and cardiometabolic outcomes.

-The researchers concluded that there were “relatively small or neutral overall associations of butter with mortality, [cardiovascular disease], and diabetes,” and that the “findings do not support a need for major emphasis in dietary guidelines on either increasing or decreasing butter consumption, in comparison to other better established dietary priorities; while also highlighting the need for additional investigation of health and metabolic effects of butter and dairy fat.”

-Of course, a study on butter was bound to make headlines. Some included “A Little Butter Won’t Kill You” (NBC News), “The Case for Eating Butter Just Got Stronger” (TIME), and “Butter Not Bad for Health … But What You Spread It On Might Be” (The Telegraph).

-We talked to Dr. Frank Hu, MD, PhD, THI member and professor of nutrition and epidemiology, as well as professor of medicine, at Harvard University, about how the headlines compared with what the review really found:

-“Most of the media headlines, I think, have exaggerated the findings, and some of the headlines were even particularly sensational and misleading. For example, TIME magazine had the headline “The case for eating butter just got stronger.” And I don’t know where that headline comes from, because the authors of the study in the paper said that their overall results did NOT support that butter is beneficial for health. [The researchers] said the results suggest that butter should neither be demonized, nor considered bad, as a route to good health. But the headlines are sensational and, to a large degree, exaggerated the main findings.”

-Dr. Hu also noted that it’s important to look at the healthfulness of butter in context with other foods. If you’re comparing the healthfulness of butter with the typical, unhealthy American diet — loaded with refined grains, soda, and red meat — then no, butter is not going to be a lot worse for you than this mixture of dietary components. “However, I think from a public health point of view, we don’t want to give an impression that we should settle on unhealthy dietary patterns,” Dr. Hu says. “We should strive for healthy dietary patterns, and then compare butter to something else in that healthy dietary pattern.”

-Previous research has shown, for instance, that “when you compare butter to stick margarine, which is loaded with trans fat, then butter is better,” he says. “But if you compare butter to liquid vegetable oils, like olive oil, and soft margarine, which contains canola oil or soybean oil, then butter is much worse. So the concept for a replacement food, or a replacement nutrient, is critically important when we convey the nutrition information to the general public.”

-While Dr. Hu noted that his eating habits would not change based on results from one study, he says that he does consume butter occasionally, mostly for flavor. Usually, though, he uses olive oil and canola oil for cooking or salads, and nut butter for a spread.

-“A small amount of butter is fine, it’s OK,” Dr. Hu says. “But it’s not desirable to include butter as a main source of dietary fat. We should use healthy fats, such as olive oil, soybean oil, canola oil, nuts, seeds, and seafood as main sources of dietary fat, instead of saturated fat. So again, the type of fat is very important.”

-At the same time, though, we should strive to reduce our consumption of unhealthy carbohydrates, such as refined starches and added sugars. That’s why “we shouldn’t just say the message is ‘if you eat unhealthy carbohydrates, you can also eat butter,’” he says.

Here’s to sticking with the tried and tested formula for a healthy diet and ignoring dietary fads – eat whole foods, mostly plants and a bit less!

-I will be travelling over the next two weekends for the Chinese New Year holidays (so the next newsletter will be sent on February 11) and would like to wish my readers a very happy, healthy and prosperous Year of the Rooster!