On the Long-Term Case for Emerging Markets, and Vegetarianism and Lower Blood Pressure!

From: Aditya Rana
Date: Sat, Mar 1, 2014 at 2:31 PM
Subject: On the Long-Term Case for Emerging Markets, and Vegetarianism and Lower Blood Pressure!


Investor concerns about emerging markets currently abound – ranging from over-reliance on global excessive liquidity created by the Fed’s QE program to rising consumer debt, lack of structural reforms, lack of corporate governance, fiscal and current account deficits and political uncertainty. EM stock markets have therefore underperformed over the last few years and the key question facing investors today is that whether this underperformance is likely to continue for a long while? The Credit Suisse 2013 Investment Returns Yearbook carries fascinating research by Dimson, Marsh and Staunton from the London Business School (authors of the investment classic – the "Triumph of the Optimists" published in 2002) on the long-term performance characteristics of emerging markets which sheds light on this critical question. To summarise:

-The EM index, after returning 10.9% versus just 1.3% for the developed world during 2000-2010, has recently underperformed significantly (see chart below) triggering headlines in the popular press such as "West is best", or "Emerging market mania a costly mistake".

-However, emerging markets today are in much better shape than during the ’80s and ’90s, and the recent setback is more like a blip in their long term performance. As the chart above shows, from 2000-2013 the terminal wealth accruing from investing in EM was almost twice that from investing in developed markets.

-The key question for investors is whether they can expect similar relative and absolute returns from emerging markets as they have seen from 2000, and to address this issue it is important to analyse data over the very long term – not just a decade or two (as seems to be the case with most recent negative reports!).

-With this objective in mind, they have constructed an EM index from 1900, initially starting with seven countries which would have qualified as emerging markets then – China, Finland, Japan, Portugal, Russia, South Africa and Spain – and subsequently adding/dropping countries to finally link into the MSCI EM index which commenced in 1988.

-The chart below shows the long term performance of emerging markets versus developed markets – in the early part of the 20th century EM outperformed, until the October 1917 Russian revolution when investors in Russia lost everything. EM then underperformed during the "Roaring 20s" but were less badly affected by the ’29 Crash, subsequently moving in line with DM equities until the mid-40s. They then collapsed for the period ’45-’49 primarily due to Japan in the aftermath of WWII and the communist takeover of China. From 1950, EM staged a long fight back (with periodic setbacks) and for the period from ’50 until 2013, they provided an annual return of 12.5% versus 10.8% for developed markets. However, this long outperformance failed to compensate for the large decline in the mid-’40s, resulting in a 7.4% annual return for the full 114 year period versus 8.3% for developed markets.

-As the chart below illustrates, the worst performance by decade was the ’40s, followed by the ’20s and the recent 2010-’13 period. The 2000-’10 period was the best decade, followed by the ’30s, 60s and the 70s. Note that EM underperformed during both the 80s and the 90s.

-As the chart below illustrates, volatility in emerging market equities has been declining (albeit with intermittent peaks and troughs) over the last few decades from 40% in end-’80 to 27% by end-2013. On a relative basis, EM volatility was twice that of developed markets in ’80, but had declined to 1.1 times by end-2013.

-While correlations between EMs and DMs have been rising over time (see graph below) , they still offer diversification benefits for investors in developed markets. In addition, developed markets are more highly correlated with other developed markets than with EMs (see second graph below) , which support the case for them being a separate asset class. Lastly, for EM based investors, diversifying into DM and other EM countries can offer significant benefits, as the average correlation between EM countries and the EM index is 0.72 while the average correlation with the DM index is only 0.46.

-Calculating the number of crises to hit both DM and EM countries since 1900 (see chart below) , illustrate that EM and DM countries have both experienced a similar number of crises, leaving aside the ’80s and the 90s. And looking at volatility and correlations during both EM and DM crises, show that a developed market crisis has a significant impact on both DM and EM, while EM crises can be more contained.

-Looking at the impact of various investing strategies like large versus small companies, value or growth stocks and momentum versus reversal strategies in both DMs and EMs, it shows that over the long-run smaller stocks, value stocks and past winners outperform. However, there can be long periods when some of these strategies underperform – for example, since 2000 bigger companies have outperformed in both DMs and EMs, with DMs having a 6.6% p.a. size premium versus 1.9% for EMs. The value premium was bigger for EMs (4.3% p.a.) versus 3.1% p.a. for DMs while the momentum factor was relatively small for EMs (0.24% per month) versus DMs (0.78% p.m.).

-Looking at annual country based market-rotation investing strategies in EM from 1976 until 2013, based on country size, prior year’s return, dividend yield, currency, past GDP growth and future GDP growth (with perfect foresight) shows some interesting results (see chart below):

-there is no obvious "small country premium".

-there is no momentum premium based on the prior year’s winners or losers.

-there exists a large value based premium based on dividend yield (21% p.a.), even if adjusted for the highest yielding markets being more risky.

-countries which experienced currency weakness in the prior year showed a high subsequent excess return (16% p.a.).

-countries which had the lowest GDP growth over the previous five years had a high subsequent return (28%) versus 14% for the highest growth countries, and the premium exists even on a risk adjusted basis.

-However, investing based on forecast GDP growth (with perfect foresight) over the next five years would result in more than 10% p.a. of excess return.

-Why does investing based on past growth underperform? If the growth is already reflected in market valuations it should result in neutral performance – not underperformance. Perhaps a better explanation is that weak growth or currency weakness is merely a proxy for the value effect – i.e. these countries are distressed and riskier, therefore investors demand a higher risk premium and real interest rate which results in higher subsequent returns. In addition, investors avoid distressed countries and flock to the growing countries and overpay for them.


-30 years ago, EMs were just 1% of world equity market capitalization and 18% of GDP – today they are 13% of the free float of investable global equities and 33% of world GDP. This trend is likely to continue as developing countries grow faster than developed countries and their domestic market open up to global investors.

-In addition, emerging markets offer significant diversification benefits for developed world investors and emerging market investors can benefit from diversifying into other EMs and the developed markets.

-Despite recent concerns, EMs are in better shape today, and less risky, than in the ’80s and ’90s.

-Emerging markets are subject to extreme shifts in sentiment – and until recently there was an overenthusiastic rush into EM, usually based on GDP growth. Over the last three years, sentiment has become overly pessimistic. Since 1950, EMs have outperformed (given their higher beta) and likely to outperform by about 1.5% per annum going forward.

-The importance of size and momentum appear to be less in EMs than in DMs, but the value effect can be the basis for a successful rotation strategy between various emerging markets.

Fascinating and robust analysis which clearly points towards adding exposure to EMs with a long-term perspective – particularly countries which are particularly cheap on a valuation basis (i.e. China, Russia) or are somewhat cheap but have experienced currency weakness (India, Brazil) – while ignoring the popular press and the naysayers!

Vegetarianism and Lower Blood Pressure:

Interesting study released in the JAMA medical journal which provides further evidence of a plant-based diet:

JAMES HAMBLINFEB 24 2014, (Huffington Health)

-Dr. Barnard and his colleagues published a meta-analysis in the prestigious Journal of the American Medical Association: Internal Medicine (https://archinte.jamanetwork.com/article.aspx?articleid=1832195 ) that confirmed a very promising health benefit of being a vegetarian: an enviably lower blood pressure than your omnivorous friends. High blood pressure shortens lives and contributes to heart disease, kidney failure, dementia, and all sorts of bad things, so any reasonable dietary way to treat or prevent it is worth considering. We’ve known for years that vegetarianism and low blood pressure are bedfellows, but the reason for it hasn’t been clear.

-"Let me be clear about this. A low carbohydrate diet is quackery," Dr. Neal Barnard told me over the phone. "It is popular, bad science, it’s a mistake, it’s a fad. At some point we have to stand back and look at evidence.""You look at the people across the world who are the thinnest, the healthiest, and live the longest; they are not following anything remotely like a low-carb diet," he said. "Look at Japan. Japan has the longest-lived people. What is the dietary staple in Japan? They’re eating huge amounts of rice." "We looked at every published study, so it’s really undeniably true."

-"We looked at every published study, so it’s really undeniably true," Barnard said, "People who follow vegetarian diets, they’ve got substantially lower blood pressures. [The effect] is about half as strong as taking a medication."

-There have been a number of blood pressure studies on vegetarian diets in recent years, most famously the U.S. National Institutes of Health’s 2006 DASH (Dietary Approaches to Stop Hypertension) studies. DASH was inspired by observations that "individuals who consume a vegetarian diet have markedly lower blood pressures than do non-vegetarians." It ended up recommending a diet high in fruits and vegetables, nuts, and beans; though it did not tell us to go all-out vegetarian.

-"What’s new here is that we were able to get a really good figure for an average blood pressure lowering effect," Barnard said. "Meta-analysis is the best kind of science we do. Rather than just picking one study or another to look at, you go after every study that has been published that weighs in on this question."

-"It’s not uncommon for us to see patients at our research center who come in and they’re taking four drugs for their blood pressure, and it’s still too high. So if a diet change can effectively lower blood pressure, or better still can prevent blood pressure problems, that’s great because it costs nothing, and all the side effects are ones that you want, like losing weight and lowering cholesterol."

-"One way of thinking about it is that a vegetarian diet lowers blood pressure," he said, "But I like to switch it around: A meat-based diet raises blood pressure. We now know that, like cigarettes, if a person is eating meat, that raises their risk of health problems."

-Weight gain aside, because that is a different variable, why do vegetarians have lower blood pressure? "Many people will say it’s because a plant-based diet is rich in potassium," Barnard said. "That seems to lower blood pressure. However, I think there’s a more important factor: viscosity, how thick your blood is."

-Eating saturated fat has been linked to viscous blood and risk for high blood pressure, according to the World Health Organization, as compared to polyunsaturated fats. Barnard paints an image of bacon grease in a pan that cools and solidifies into a waxy solid. "Animal fat in your bloodstream has the same effect," he says. "If you’re eating animal fat, your blood is actually thicker and has a hard time circulating. So the heart has to push harder to get the blood to flow. If you’re not eating meat, your blood viscosity drops and your blood pressure drops. We think that’s the more important reason. It also reduces the amount of oxygen that’s getting to their brain and they just fall asleep."

-"And what else could be affected by blood flow? One thing might be athletic performance. Take the fastest animals, take a stallion, they don’t eat meat or cheese, so their blood is not viscous at all. Their blood flows well. As you know a lot of the top endurance athletes are vegan. Scott Jurek is the most amazing ultra-distance runner in the world. That’s why Jurek says a plant-based diet is the only diet he’ll ever follow. Serena Williams is going vegan, too. A lot of endurance athletes are doing it. If you consider tennis an endurance sport."

"Where should we be getting the protein to rebuild our muscles after a 100-mile run," I asked, "if there’s no meat on the table?" "Well, the same place that a stallion or a bull or an elephant or a giraffe or a gorilla or any other vegan animal gets it. The most powerful animals eat plant-based diets. If you’re a human, you can eat grains, beans, and even green leafy vegetables. "

Here’s to eating more whole grains, vegetables, legumes and fruits and doing away with meat, fish and dairy or making it a side-dish!




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