On Does Growth Matter for Equity Returns, Animal Protein and Cancer Risk!

From: aditya
Date: Sun, Mar 9, 2014 at 2:25 PM
Subject: On Does Growth Matter for Equity Returns, Animal Protein and Cancer Risk!


In their 2002 investment classic "Triumph of the Optimists", Dimson, Marsh and Staunton from the London Business School presented a controversial finding- that stock market returns are not correlated with past economic growth. In the most recent Credit Suisse handbook (https://www.credit-suisse.com/ch/fr/news-and-expertise/research/credit-suisse-research-institute/publications.html )they examine this vexing issue further and draw some intriguing conclusions which support the above basic premise but also negate the notion that economic growth does not matter for stock market returns. To summarise:

-In their 2002 book they found that high economic growth was not associated with high dividend growth – in fact, the correlation was surprisingly negative (-0.53). Updating the results (as shown in the chart below) since 1900, GDP per capita growth was negatively correlated with real equity returns (-.29). This relationship holds during the post 1950 period as well.

-However, replacing GDP per capita growth with the growth of aggregate GDP reveals a positive correlation of 0.51 (see chart below).

-Aggregate GDP growth is influenced by population growth and movements, national border changes and other factors which result in the economic output being shared amongst a larger population. The relationship between aggregate GDP and population growth can be clearly demonstrated by the graph below – showing a correlation of 0.65.

-However, population growth results in a sharing of the economic growth amongst a larger population thereby reducing GDP per capita growth by 0.1 to 2.1% (as shown by the chart below). This is akin to a company issuing shares to finance future growth, which can reduce earnings per share for existing shareholders.

-A widely held belief amongst investors is that high economic growth results in higher corporate profits and dividends which in turn imply higher equity returns – this is why global asset allocations are based frequently on economic growth forecasts.

-Analysing historical economic growth across a variety of DM and EM countries one can make some interesting observations: 1) periods of high (or low) economic growth are shared across countries and tend to cluster in time, 2) besides some notable exceptions, it is hard to find periods of high economic growth uninterrupted by setbacks (i.e. lack of persistence-see two charts below), 3) there are few signs of momentum in economic growth – i.e. between high (low) growth today and high (low) growth in the future (see third chart below), and, 4) there is a tendency for economic growth to mean-revert. This lack of persistence in economic growth makes it hard to forecast future GDP growth.

-While the correlation between real US equity returns and changes in GDP per capita during the same year is essentially zero (0.06), the correlation between changes in GDP per capita and real returns on the US stock market in the preceding year is 0.46 (see chart below). Investors’ decision-making tends to quite accurately anticipate changes in the economy as shown in their earlier work (2010) – i.e. stock market fluctuations predict changes in GDP, but changes in GDP do not predict equity returns.

-Looking deeper into the question of whether economic growth is a good predictor of future equity returns, they look at data from 85 countries (both DM and EM) from 1972, with two sources of GDP growth predictions: 1) an extrapolation of past GDP growth, and, 2) a forecast of GDP growth with perfect foresight. They then compare the performance of five hypothetical portfolios ranging from the slowest 20% growing economies to the fastest 20% growing economies.

-Some interesting conclusions can drawn from this analysis (see chart below):

1)there is no evidence of outperformance by countries with high growth in the past – in fact, low growth countries have outperformed.

2) countries which were going to have high growth in the future outperformed-i.e. accurate predictions of future growth are very valuable.

-3)accurate predictions of growth for the current year also have value.

-Looking further into the issue of the "gap" between GDP growth per capita and real dividend growth per share (a proxy for corporate profitability) – which has averaged 2.34% (ranging from 0.72% for former British colonies to 3.29% for countries ravaged by the war-see table below), it seems that higher GDP growth has translated into cash-flow returns for shareholders in varying degrees across countries, with countries devastated by war providing the lowest comparable returns.

-Analysing the components of equity return for various countries- growth of real dividends (ranging from 1.24% to -0.78%), growth of dividend yields (which over the long-term have mostly fallen implying shares selling at a higher price relative to fundamental value – with the dividend being a proxy for fundamental value) and annual dividend yield (the main component of total equity return) show some interesting results (see table below):

-In the US, real dividends grew at a high rate (1.63%), and its dividend yield contracted (-0.54%) implying a relatively high appreciation in the real US equity market (2.18% per year). By contrast, New Zealand despite having had a high growth rate of real dividends (1.27%), had an increasing dividend yield (0.66%) leading to relatively poor real appreciation of the equity market (0.61).

-Adding the dividend yield to the capital gain for each country provides the total return for each country’s equity market, which has averaged 4.35% for all the countries.


-Equity investors don’t seem to have captured all the upside from increase in per capita GDP (see first graph below). However, increases in aggregate GDP have been associated with superior stock market performance (see second graph below) .

-The possible reasons behind this "gap" include:

-the growth of listed companies contribute to only a portion of GDP in countries which have a only small proportion of listed companies, with the government and private companies being the drivers of economic growth.

-the stock market could expand as a result of IPOs, privatizations or share offerings which exclude existing investors who do not participate in the new shares created.

-stock prices are good predictors of future growth and therefore higher growth might already be "priced-in" thereby providing for lower expected returns.

-buying equity in fast growing economies which are becoming less risky would offer lower expected returns than economies which are growing at a slower pace and are perceived to be more risky therefore offer higher expected returns.

-there is ample evidence that investors can continue to bid up growth assets until they offer lower expected returns than distressed/value assets which have been shunned by investors.

-While there is a lack of a clear relationship between economic growth and stock returns, investors should not draw the fallacious conclusion that economic growth does not matter – the ultimate prosperity of companies depends on the growth of the national and global economy.

Thought provoking research which offer some very helpful guidelines for investing:

-Focus on estimating current and future growth rather than past growth to make investment allocations.

-Look at valuations to see if the market has already priced-in the higher (or lower) growth prospects.

-Growth in aggregate GDP driven by population growth does seem to have some predictive value for equity returns (see table above)- perhaps this is driven by the ability to keep wage growth under check resulting in higher corporate profitability (reflected by growth in dividends).

-Buying into "riskier" countries which have had a recent drop-off in growth could provide superior returns compared to higher growing countries with rich equity valuations.

Some investment implications for the current environment:

-EM countries which have performed poorly (in terms of both historical growth and equity returns) in recent years, with the stock market (correctly) anticipating lower growth, could now be providing a superior expected return if growth has stabilised or bottomed out. The key additional criteria would be valuations – and China stands out as an exceptional opportunity on this basis (as do Brazil and Russia). India (and Europe) looks interesting – with growth perhaps bottoming out though the stock market has partially anticipated this.

High Animal Protein and Cancer Risk:

An interesting study which is the first to show a direct link between a high intake of animal protein and increased risk of cancer.

March 4, 2014. Science Daily

University of Southern California.

Low Protein Intake Is Associated with a Major Reduction in IGF-1, Cancer, and Overall Mortality in the 65 and Younger but Not Older Population. Cell Metabolism, 2014; 19 (3): 407-417 DOI: 10.1016/j.cmet.2014.02.006


A high-protein diet during middle age makes you nearly twice as likely to die and four times more likely to die of cancer, but moderate protein intake is good for you after 65. But how much protein we should eat has long been a controversial topic — muddled by the popularity of protein-heavy diets such as Paleo and Atkins. Before this study, researchers had never shown a definitive correlation between high protein consumption and mortality risk.

-Not only is excessive protein consumption linked to a dramatic rise in cancer mortality, but middle-aged people who eat lots of proteins from animal sources — including meat, milk and cheese — are also more susceptible to early death in general, according to new research.

-That chicken wing you’re eating could be as deadly as a cigarette. In a new study that tracked a large sample of adults for nearly two decades, researchers have found that eating a diet rich in animal proteins during middle age makes you four times more likely to die of cancer than someone with a low-protein diet — a mortality risk factor comparable to smoking.

-"There’s a misconception that because we all eat, understanding nutrition is simple. But the question is not whether a certain diet allows you to do well for three days, but can it help you survive to be 100?" said corresponding author Valter Longo, the Edna M. Jones Professor of Biogerontology at the USC Davis School of Gerontology and director of the USC Longevity Institute.

-Not only is excessive protein consumption linked to a dramatic rise in cancer mortality, but middle-aged people who eat lots of proteins from animal sources — including meat, milk and cheese — are also more susceptible to early death in general, reveals the study to be published March 4 in Cell Metabolism. Protein-lovers were 74 percent more likely to die of any cause within the study period than their more low-protein counterparts. They were also several times more likely to die of diabetes.

-Rather than look at adulthood as one monolithic phase of life, as other researchers have done, the latest study considers how biology changes as we age, and how decisions in middle life may play out across the human lifespan.

-In other words, what’s good for you at one age may be damaging at another. Protein controls the growth hormone IGF-I, which helps our bodies grow but has been linked to cancer susceptibility. Levels of IGF-I drop off dramatically after age 65, leading to potential frailty and muscle loss. The study shows that while high protein intake during middle age is very harmful, it is protective for older adults: those over 65 who ate a moderate- or high-protein diet were less susceptible to disease.

-The latest paper draws from Longo’s past research on IGF-I, including on an Ecuadorian cohort that seemed to have little cancer or diabetes susceptibility because of a genetic mutation that lowered levels of IGF-I; the members of the cohort were all less than five-feet tall.

-"The research shows that a low-protein diet in middle age is useful for preventing cancer and overall mortality, through a process that involves regulating IGF-I and possibly insulin levels," said co-author Eileen Crimmins, the AARP Chair in Gerontology at USC. "However, we also propose that at older ages, it may be important to avoid a low-protein diet to allow the maintenance of healthy weight and protection from frailty."

-Crucially, the researchers found that plant-based proteins, such as those from beans, did not seem to have the same mortality effects as animal proteins. Rates of cancer and death also did not seem to be affected by controlling for carbohydrate or fat consumption, suggesting that animal protein is the main culprit.

-"The majority of Americans are eating about twice as much proteins as they should, and it seems that the best change would be to lower the daily intake of all proteins but especially animal-derived proteins," Longo said. "But don’t get extreme in cutting out protein; you can go from protected to malnourished very quickly."

-Longo’s findings support recommendations from several leading health agencies to consume about 0.8 grams of protein per kilogram of body weight every day in middle age. For example, a 130-pound person should eat about 45-50 grams of protein a day, with preference for those derived from plants such as legumes, Longo explains. The researchers define a "high-protein" diet as deriving at least 20 percent of calories from protein, including both plant-based and animal-based protein. A "moderate" protein diet includes 10-19 percent of calories from protein, and a "low-protein" diet includes less than 10 percent protein.

-Even moderate amounts of protein had detrimental effects during middle age, the researchers found. Across all 6,318 adults over the age of 50 in the study, average protein intake was about 16 percent of total daily calories with about two-thirds from animal protein — corresponding to data about national protein consumption. The study sample was representative across ethnicity, education and health background.

-People who ate a moderate amount of protein were still three times more likely to die of cancer than those who ate a low-protein diet in middle age, the study shows. Overall, even the small change of decreasing protein intake from moderate levels to low levels reduced likelihood of early death by 21 percent.

-The researchers also extended their findings about high-protein diets and mortality risk, looking at causality in mice and cellular models. In a study of tumor rates and progression among mice, the researchers show lower cancer incidence and 45 percent smaller average tumor size among mice on a low-protein diet than those on a high-protein diet by the end of the two-month experiment.

-"Almost everyone is going to have a cancer cell or pre-cancer cell in them at some point. The question is: Does it progress?" Longo said. "Turns out one of the major factors in determining if it does is protein intake."

Here’s to reducing animal protein (meat, fish, eggs & dairy) in your diet – the evidence continues to accumulate!




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