On China; Demystifying Calories!

From: aditya rana
Date: Sat, Dec 6, 2014 at 1:23 PM
Subject: On China; Demystifying Calories!

Hi!,

The recent surge in the Chinese stock market has allowed it to claim the title of the best performing major stock market in the world (+38.2% in US$ versus +34.5% for the Indian stock market). This has taken place despite continued widespread concerns (especially in the Western media) about a China hard landing and an imminent implosion of its property bubble. Morgan Stanley, recently publish two reports making the case for the commencement of secular bull market in China, which makes some interesting points and clarifies some prevailing misconceptions about the local stock market. To summarise:

-The China A-shares market has delivered superior dollar returns since 2000 : 12% per annum for Shenzhen-A and 8% per annum for Shanghai-A outperforming the U.S., Europe, Japan and Hong Kong (contrary to popular perceptions that the Chinese stock market has vastly underperformed-see chart below!).

The capitalization of China’s A-share market has tripled since 2009 reaching $ 5 trillion, while the free float has quadrupled to $1.6 trillion (see chart below).

-Year-to-date until October 2014, the Chinese stock market (+8.0% Shanghai, +15.8% Shenzhen) has outperformed other domestic asset classes like real estate (+0.2%), bank deposits (+2.0%) and wealth management (i.e. trust) products (+5.9%).

-This is a reversal of the trend since 2008, when the stock market significantly underperformed (-12.4% Shanghai p.a., -4.3% Shenzhen p.a.) the real estate market (+14% p.a), bank deposits (+3.0% p.a.) and wealth management products (+8.8% p.a.). This drove private investors away from stocks and into housing and wealth management products.

-This reversal has been supported by the imposition of regulatory measures to cool the property market and impose restrictions on trust products, the government’s effort to support the stock market through official statements (in August and September), loosening requirements for new account openings and margin funding, and better access to foreign investors through expansion of QFII and RQFII and implementation of the MMA scheme.

-Since April 2014 China A shares have rallied and this has continued, even as the MSCI China and Hang Seng indices have corrected since September, following concerns about an economic slowdown in China and the demonstrations in Hong Kong (see chart below).

-The rally is the stock market has been enthusiastically embraced by local investors, as illustrated by the number of new account openings which have surged up in recent months (see chart below) and the daily trading volume on the stock exchanges which are a record high (see second chart below).

-To develop target prices for 2015, projections of the two key components – EPS growth and P/E multiple are required. EPS growth is assumed to be 10% which is well below the 15.4% historical average but closer to the average over the last few years. Noting that changes in the P/E multiples have been a more important driver of stock market returns than changes in EPS , P/E multiple scenarios are developed using historical analysis as well as using the S & P 500 and the Indian stock market as benchmarks.

-With the Shanghai-A currently trading at a P/E multiple of 14.2 x 12-month trailing earnings, which is a 35% discount to its 10-year average (see chart below), and assuming it reverts to its historical average of 21.8x , the upside for the stock market is 70% from current levels (as of December 5, ‘14).

– If the Shanghai-A multiple goes back to it 10-year low (i.e. a 1 std move below the historical average), then the downside is 28% from current levels.

-Assuming the Shanghai-A multiple moves higher by 1 std over its 10-year average then the upside is 165% from current levels.

– If the Shanghai-A multiple reaches its 2007 peak of 71.4x, then the upside is 450% from current levels.

Assuming the Shanghai-A multiple reaches the S&P 500 level of 18.4x then the upside is 42% from now, and if it reaches the India-Nifty level of 21.8x its upside is 70% from now.

-Great research which makes a convincing bull case for Chinese stocks. The Chinese stock market does appear to be at the early stages of a secular bull market which could run until the end of this decade and perhaps even beyond. There will surely be cyclical bear markets along the way, but cheap valuations, supportive government actions, and increased participation by both domestic and foreign investors (who are grossly underweight) should provide strong support for the market. In addition, a strong long-term factor supporting the market is that the stock market has significantly underperformed GDP growth (about 5% versus 14-15% for GDP over the last 20 an more years), and over time these two measures must converge – so the Chinese stock market has a lot of catching-up ahead of it – even while GDP growth slows down.

-A little publicised factor has been the upsurge in the Shanghai Index since July (see chart below) right after PBOC introduced the CNY 1 trillion of ‘Pledged Supplementary Lending’ (PSL) to China Development Bank – later dubbed "QE-Lite." This was followed by a $87 billion stimulus announced by the government in September and then the surprise rate cut by the PBOC recently. Government support for asset prices is a global phenomenon and as pointed out in last week’s letter, it is pointless to position against it. Having said that, the market has had a phenomenal run over the last few weeks and is probably due a pull back. With the final Fed meeting for the year on December 15 & 16, and the increasing likelihood of them dropping the “considerable time” language relating to a rate increase next year, we are likely to see some turbulence in global markets as we approach year-end. If that transpires, use it as a buying opportunity! ETFs referenced to the domestic market are ASHR-CSI 300 index-large cap A shares, ASHS –CSI 500 index-small cap A shares, or 3188.HK – CSI 300 index.

Demystifying Calories:

Is a calorie a calorie and do you need to count calories? Two pressing questions if you are concerned about your weight. As usual, Dr. David Katz, Director of the Yale University Prevention Centre provides some clarity to the obfuscation prevailing regarding this simple but key health issue:

Huff Health; 12/2/’14

-There are three good reasons to write about calories right now. First, the FDA just took action to regulate calorie labeling in chain restaurants. Second, colleagues just published yet another peer-reviewed paper probing the mysterious depths of the enigmatic calories.

Third, and most important, if your Thanksgiving was anything like mine, you just had a close encounter with a particular horde of the little devils — and enjoyed every minute of it. I hope so.

-Considering that calories are a unit of heat, it’s amazing how much energy is expended trying to shed light on a subject that is only as cryptic as we choose to make it.

The perennial debate, propagated yet again in the new paper, is whether (a) calories count, and (b) a calorie is a calorie. My reliably erudite answers are (a) duh and (b) hell yeah!

I think the questions are silly.

-The calorie is literally, exactly, and only, a measure of heat or energy. Specifically, the calorie, per se, is the energy required to raise the temperature of one cubic centimeter of water one degree Celsius at sea level. We generally are invoking the kilocalorie when we speak of food, and use "calorie" as shorthand. The kilocalorie is the stored energy required to raise the temperature of one liter of water just that much under just those conditions.

-The debates, or from my perspective pseudo-debates, about the relevance of calories emanate from two serious fallacies: the first is that for calories to count, counting calories must be the most important way to control weight; and the second is that if the quantity of calories matters, the quality must not. Both of these are nonsense.

-An analogy is the best way to discredit them as such. Let’s think of fuel, a tank, and an engine. A gallon, after all, is a gallon. It’s a standard measure of volume. It just is what it is.

-However, I trust we all agree that "a gallon of what" matters when filling up a tank. The fuel needs to be the right fuel for a given car, for instance. All cars run on closely related varieties of fuel, just as all Homo sapiens run well on variations of the same basic dietary theme: wholesome foods in sensible combinations. But people and cars vary. Some cars need high test, some don’t. Some people need more protein, some need less.

-But in both cases, it of course matters what the fuel is. That in no way obviates the relevance of quantity: the volume of a gallon, the gallons per tank.

-The nature of the engine also matters. Any of us who owns a car considered fuel efficiency when making the purchase. Does variation in fuel efficiency mean a gallon ISN’T a gallon? If one car goes 15 miles on a gallon, and another 45, doesn’t that make the gallon suddenly mysterious?

-No, it just means engines differ. In almost exactly the same way, human metabolism varies. Some of us need more fuel to go any given distance, some of us need less. Such variations are traceable, to one degree or another, to variations in our resting energy expenditure, in turn related to variations in our genes, our gene expression, and our intestinal microbes.

-In a way most of us understand without any real effort, the quantity of fuel, the size of the tank, the kind of fuel and the engine all matter. If the kind of fuel and particular engine are fixed, the relevance of volume is clear. Put too little fuel in the tank, and you run out of gas before you get where you’re going — no matter how "good" the fuel or efficient the car. Put too much fuel in the tank, and you either flood the tank, the engine, or the driveway. Volume matters. A gallon is a gallon.

-But, just as obviously, if you fix the volume, and the engine, then the quality of the fuel discernibly matters. Put in a gallon of poor quality, diluted fuel — and the car will run badly, and less far. Put in the same gallon of high quality fuel well matched to the engine — and the car will perform much better.

-Finally, fix the quantity and quality of fuel, but vary the engine — and its relevance is equally obvious. Put the same gallon of fuel into a Hummer or a Prius, and very different trips will result. The trips differ — but a gallon is still a gallon.

-The only good questions about any of this are: Why do I care, and why should you? Because seemingly good answers to fundamentally silly questions can be dangerously distracting. Consider again the recent FDA action.

I favor calorie labeling, because making somewhat informed decisions is generally better than being utterly clueless. Meaning no offense, most Americans are utterly clueless about calories- demonstrated in every study assessing the average citizen’s capacity to estimate the calorie content of this or that.

-But calorie labeling may greatly exaggerate the relevance of calories. Consider the work of Pulitzer Prize winner Michael Moss, for instance. Moss is the most recent, if not the first, to detail the skillful, sophisticated work of the food industry designing foods that maximize the number of calories it takes for us to feel full. Those famous "100 calorie" snacks do not seem to help much with total calorie, or weight, control. True, they provide only 100 calories at a time – but most of them are junk foods that propagate appetite, induce almost no satiety, and leave you craving more. FDA calorie labels could, inadvertently, lead people to fewer calories in the guise of smaller portions of junky foods. Nothing good will come of that.

-Ideally, then, the at-a-glance information would address not just the quantity of calories, but also their quality. That certainly can be done. Such a measure could, should, and in at least one case does incorporate various factors related to satiety. By maximizing the satiety quotient of foods, which is closely related to overall nutritional quality, the number of calories it takes to feel full can be minimized. This is crucial, because the best way to control the quantity of calories you consume without going hungry is to improve the quality of those calories.

-Calorie labeling is better than no calorie labeling, but not nearly as good as labeling that captures both quantity and quality. Yes, calories count, but counting calories is tedious and unnecessary, if you instead get the big picture right: wholesome foods, in sensible combinations. Yes, of course, a calorie is a calorie just as a gallon is a gallon. But fuels vary, and engines vary — and they matter, too.

-I care about this, because I care about using what we know to add years to life and life to years. The more time and energy we devote to questioning answers that are little less than self-evident, the less of our collective wherewithal is left to answer genuinely important questions.

Here’s to focusing on eating wholesome (i.e. not processed) and balanced (i.e. whole grains, veggies, fruits, legumes, nuts and a bit of meat if necessary!) food in appropriate (eat until 80% full) quantities!

Regards,

Aditya

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