On the Case for Emerging Markets Investment and an Ayurvedic Approach to Thyroid Disorders!

From Aditya Rana Date: Sun, Feb 19, 2012 at 12:07 PM
Subject: On the Case for Emerging Markets Investment and an Ayurvedic Approach to Thyroid Disorders!

Hi!,

In the process of developing an investment framework, it is helpful to ask yourself the question – “What are the generators of global growth and profitable investment opportunities over the long run?”. It can be argued that it is more relevant to make country asset allocation decisions based on expectations of future GDP weightings between a group of countries than their current GDP weightings. With this objective in mind, I summarise below a note from two Citi economists Willem Buiter and Ebrahim Rhabari (http://voxeu.org/index.php?q=node/6374 ) , that looks at future sources of global economic growth between 2010 and 2050 and comes up with 11 countries which fulfil the criteria.

-The forecasts are based on three sources of information:

-Individual forecasts of GDP , per capita GDP, inflation and market exchange rates for 58 countries.

-Historical GDP data for the most recent 10-year period.

-A few centuries of research on the drivers of long-term economic growth.

– Some key growth drivers have been identified:

-gross fixed capital formation (as a share of GDP).

-gross domestic savings (as a share of GDP).

-a measure of human capital-aggregating demographic, health and educational achievement indices.

-a measure of institutional quality.

-a measure of trade openness.

-an initial level of per capita income.

-A key idea underlying the forecasts has been the concept of catch-up or convergence growth – starting from the local knowledge embedded in each individual growth (and demographic) forecasts, plus the growth rate over the last decade, and then modelling the convergence rates with the US as the frontier technology country.

-The world economy is likely to experience strong growth until 2050 – with real GDP (at PPP exchange rates) growing at 4.6% per annum until 2030 and 3.8% thereafter, causing global real GDP to rise from $73 trillion in 2010 to $377 trillion in 2050.

-The 11 countries identified were selected on the basis of an average real per-capita GDP growth rate of 5% or more based on PPP exchange rates.

-Of the 11 countries identified, 9 countries are in emerging Asia and the other two are in Africa.

-China will overtake the US to become the largest economy in the world by 2020 (at PPP exchange rates, and a decade longer at market exchange rates), and will itself be overtaken by India by 2050.

-Brazil and Russia are not in the list for several reasons: a) they are significantly richer than the other countries and a lot of catch-up has already occurred, b) they both have low investment rates, and, c) at later stages of the convergence process the quality of institutions and policies matter more than in the early stages – and both, but especially Russia, have material weaknesses in this area.

-The 11 countries are: Bangladesh, China, Egypt, India, Indonesia, Iraq, Mongolia, Nigeria, Philippines, Sri Lanka, and Vietnam.

-Projections and forecast are smooth, while actual growth is not smooth and there are likely to be “growth disasters” caused by bad policies, internal and external conflicts and natural disasters. The inability to forecast local growth disasters makes the projections somewhat optimistic.

-“However, even allowing for this, there has never been a better time for humanity, as regards satisfying material wants than the first half of the 21st century is likely to be”.

Fascinating stuff, and no doubt that some of the countries in the group of 11 would be a surprise to some people. While the actual growth rates over the next 40 years might be quite different from what has been forecasted, nevertheless it is an important exercise to go through to think about how one should weight their asset portfolio. As I have mentioned several times previously, a diversified portfolio weighted towards equities in China, India, international energy and natural resources, high quality multinationals, select other emerging markets (perhaps adding some of the other names in the list?) and EM local currency bonds should benefit enormously from the shift in economic growth to these countries.

On the topic of appropriate country weightings in global equity portfolios, I came across a recent interview with Burton Malkiel (Princeton economics professor and author of the noted book “A Random Walk Down Wall Street”) and his business partner Kevin Carter who made some interesting observations:

-Current world equity indices (and funds) are grossly underweight in emerging markets, and in particular China. Global equity funds on average have 10% allocated to emerging markets, with China having a 17% weight in the emerging markets benchmark, making the final allocation to China only about 1.7%.

-This contrasts sharply with China’s dominant role in the global economy – China is 10% of world GDP (15% at PPP exchange rates), 9% of world trade, and is estimated to have accounted for 25% of world GDP growth in 2011.

-The reasons for this are : 1) archaic concepts of what constitutes a developed and an emerging country (Greece and Ireland are developed and China is not?!), 2) a faulty “float-adjustment” factor which penalises Chinese companies which have a large proportion of shares owned by the government and are therefore not deemed liquid enough – even though large companies like Petro China have liquid floats as large as $70 BN (on a pre-float adjustment basis the China weighting would be 8%) , and 3) the non-inclusion of A-shares listed in Shanghai and Shenzen (as they are deemed inaccessible for foreign investors even though there are a variety of funds and ETFs which provide such access) and Chinese companies listed in the US.

Regarding valuations in EM, Goldman Sachs Asset Management provides an interesting graph which tracks the equity risk premium (real earnings growth based on projected real GDP growth trends + real dividend yield growth – real bond yield) of various countries, including the BRIC countries. China is clearly the cheapest market, followed by India and Russia. Adding the expected inflation rates and real bond yields for each country then provides the expected annual nominal growth rates in the stock markets – which range from 13.4% (India) to 14.1% (China).

An Ayruvedic approach to Thyroid problems (Dr. Vasant Lad):

Thyroid gland disorders are a growing worldwide health issue (and widely misdiagnosed as per many alternative health practitioners!) and I will cover the Ayurvedic approach in managing this problem in the next several newsletters. The thyroid gland is called jatru granthi , and produces three major harmones: thyroxine (T4), triiodothyronine (T3) and calcitonin. Calcitonin helps to regulate calcium levels in the blood. The gland also produces thyroglobulin (Tg) which is an iodinated glycoprotein that helps produce the three thyroid hormones. The production of the thyroid hormones is regulated by the pituitary gland, which releases thyroid-stimulating hormone (TSH) to stimulate production of T3 and T4.

The thyroid gland accumulates inorganic iodine, which is necessary for the production of thyroid hormones (jatru agni). When there is a lack of dietary iodine, it affects production of the thyroid hormone, resulting in the cells of the thyroid gland becoming enlarged in an attempt to acquire more iodine. This produces the condition goiter, which appears to be a swelling in the front of the throat. Consumption of excess calcium can also cause this condition. A lack of iodine in the soil, along with the usage of non-iodized salt, directly results in a higher incidence of goiter.

The stomach is the seat of jathara agni (gastric fire), which governs digestion, absorption and assimilation of food stuff in the GI. The liver is the seat of bhuta agni, and liver enzymes are a component of bhuta agni that acts via the thyroid. Bhuta agni governs mineral metabolism and this has an important role in the functioning of the thyroid gland. Dhatu agni governs further molecular digestion and transformation of the organic elements of food and water into the biological components of bodily cells. Jatru agni (i.e. thyroid hormones) are a bridge between bhuta agni and dhatu agni. If agni is increased, the dhatus are decreased, whereas if agni is low, then there will be undue production of raw tissue which leads to excessive tissue growth.

To be continued.

Keep the gastric fire burning and the thyroid healthy!

Regards

Aditya

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