On Global Growth and Productivity; A China Equity Update; White Rice and Diabetes?

From: aditya rana
Date: Sat, Mar 28, 2015 at 2:32 PM
Subject: On Global Growth and Productivity; A China Equity Update; White Rice and Diabetes?


Economic growth matters for long term equity returns, not necessarily the current absolute growth level (which might already be factored into equity prices) but being able to anticipate changes in future growth rates with reasonable accuracy. The McKinsey Global Institute recently published a report on global growth prospects which provides a helpful framework to think about the prospects for economic growth across different countries and regions (http://www.mckinsey.com/insights/growth/can_long-term_global_growth_be_saved ). To summarise the key points:

-Economic growth over the last 50 years was exceptional – with the global economy expanding 6 times and per capita income almost tripling. This growth has had a dramatic impact on the lives of millions of people by allowing them to escape poverty. However, the prospects for the next 50 years look less promising with growth settling down closer to long term levels (see chart below), unless productivity rates can be increased significantly.

-Over the last 50 years, the two main drivers of growth have been a rapid expansion in the number of workers (+1.7% annually) and rising productivity rates (+1.8% annually), which led to an increase in output per worker by 2.4 times. However, slowing population growth and increasing life expectancy are limiting growth in the working-age population.

-Over the next 50 years, employment is expected to increase by only 0.3% annually and despite assuming productivity rates rise to average levels achieved over the last 50 years, global GDP growth is expected to fall by 40 percent to about 2.1%. Per capita income (an expected 20% drop) and living standards will therefore rise more slowly.

-Global employment has been slowing for two decades, with the number of workers already declining in Germany, Italy, Japan and Russia; while China and South Korea are expected to see a decline from 2024 (see chart below). However, if appropriate policies to boost labour-market participation amongst women, young people and those over the age of 65 are followed, the employment growth rate could double to 0.60% per annum. But this will not be enough to compensate for the decline in the workforce.

-The potential for lower growth varies significantly across countries, with the largest drops expected to occur in Canada and Germany in the developed world; and in Saudi Arabia, Mexico, Russia and Brazil in the developing world.

-Therefore, the other driver of growth – productivity – is key to achieve higher growth rates. Productivity rates would need to increase to 3.3% (80 percent faster than the levels over the last 50 years) to offset the slower employment growth rate.

-Emerging markets have the best opportunity to improve productivity, as the methods are well known and currently available, with rising labour productivity going hand in hand with growth in income, consumption and GDP.

-Based on micro analysis of five core sectors – agriculture, automotive, food processing, healthcare and retailing – there exists a potential to boost productivity growth rates to 4% (see chart below).

-Three-quarters of the potential increase in productivity through 2025 can come from adopting existing best practices or catch-up, while the balance comes from technological, operational or business innovations which push out the production frontier (see chart below). In particular, improving the traditionally low productivity of the growing government and healthcare sectors would be critical.

-Business has to play the lead role in this process by upgrading capital and technology, investing in R&D and unproven technologies, providing for a more flexible work environment for women and older workers, and training younger workers. Governments should provide an environment which is conducive to growth.

-Boosting productivity is the only way forward to drive growth and therefore productivity and innovation should form the basis for any discussions on long-term growth.

-Interesting piece which hones in on the key factor which is likely to drive global growth going forward. The falling rates of productivity in the developed world is somewhat of an enigma given the technological advances of recent years. As Andew Smithers highlights in his FT blog (see chart below), GDP per hour (a proxy for productivity) worked in the U.S. has risen at 0.7% annually over the past five years (0.4%over the last 4 years and 0.8% over the last 3 years). He also notes that investment in R&D has actually been rising in the U.S., while spending on plant and equipment has been falling. While the increased R&D spending has not yet shown through in the productivity numbers, productivity could increase in the future due to lag effects. By contrast, emerging markets have the low hanging fruits to pick in terms of boosting productivity, and subject to conducive government policies, most EM economies offer higher potential growth rates (and higher expected equity returns).

A brief update on the China equity market based on a recent report from Morgan Stanley:

-The Shanghai A share index has broken through on the upside from a trading range which has been in place since January. The year-end target provides 15% to 40% upside from here based on normalization of PE levels.

-The recent triggers for the upside include: 1) the first step in resolving the debt overhang issue announced last week – to swap high cost local government to low cost government bonds, 2) positive comments on the equity market’s role in China’s development made by the PBOC governor last week, and, 3) the return of investor funds locked-in for the subscription of last week’s 24 IPOs.

-The rationale for the secular bull market in China’s A shares remains unchanged:

1)Strong policy support for the equity market – in the Third Plenary announcement and subsequently demonstrated by the HK/Shanghai Connect program (to be extended to Shenzen later this year) and other market initiatives related to the expansion of margin trading and derivatives.

2)Continued monetary easing by the PBOC which is very supportive for equity markets.

3)Embracement of equities by local investors as returns on alternative investments continue to decline. Since the end of the Chinese New Year holidays, new account openings and market trading volumes have moved significantly higher (after declining in January).

4)Valuations remain attractive with Shanghai A shares trading at 17.3x trailing P/E versus the 10-year average of 22.0x and a median of 28.8x.

-The inclusion of A shares in the MSCI index is unlikely to be a significant factor – the implementation will not be until the summer of 2016 and will result in a weighting of only 1% in the MSCI index due to free float restrictions and quota limits in the Connect program.

-The main driver of the market this year is expected to continue to be the A share market, with the H shares underperforming, though the Connect program will ultimately restrict how much the A/H dual listed premium (see graph below) can expand.

-The breaking of the 3,500 level on the upside by the Shanghai composite index is an important technical indicator supporting the commencement of the next stage of the bull market, after a period of range trading following the 52% rise last year. To summarise the relative performance of the various market segment ETFs on a YTD basis:

-ASHR (CSI 300 index – the 300 largest and most liquid stocks in Shanghai & Shenzen): +7.3% YTD (1 yr + 83%)

2823.HK (FTSE A-50 index – largest and most liquid stocks in Shanghai): + 1.2% YTD (1 yr +65%)

-ASHS (CSI 500 index – the 500 largest and most liquid small/mid cap stocks): + 27.8% YTD

-CNXT (ChiNext Index – the 100 largest and most liquid stocks on the SME Enterprise Board): +38.2% YTD

-CN (MSCI China Index – comprising China Shares listed in China, HK, US): 7.5% YTD

2828.HK (H-Share Index – China shares listed in Hong Kong): -.7% YTD (1 yr +32%)

-KWEB (China internet stocks): -.8% YTD

-Typically, the more speculative range of the equity spectrum in China (i.e. small/mid cap stocks and the ChiNext index) have led rallies in the broader market which bodes well for the A Share index going forward.

White Rice and Diabetes?

An interesting presentation from Dr. Greger which calls into question some recent studies which implicate white rice in the sharp rise in diabetes in China and Japan (http://nutritionfacts.org/video/if-white-rice-is-linked-to-diabetes-what-about-china/ ) . Some key points:

-Rice is the most widely eaten food staple in the world (and has been for the last 5,000 years), feeding about 50% of the world’s population.

-A recent meta-analysis looking at various research reports covering 350,000 people over a period of 4 to 22 years, concluded that white rice consumption greatly increased the risk of diabetes (a single serving each day increasing diabetes risk by 11%)– especially in Chinese and Japanese populations.

-China has almost the same incidence of diabetes (9.7%) as the U.S. (11%) despite having 7 times less obesity levels. Japan has even more newly diagnosed cases of diabetes (9%) versus the U.S. (8%), despite having 8 times less obesity levels.

-Studies have also indicated that eating whole grains and whole fruits actually reduces the risk of diabetes, while white rice and processed grains and fruits increases the risk of diabetes. Studies have also has shown that whole grains actually lower the risk of heart disease and strokes, while white rice is at best neutral with regards to heart disease and strokes.

-However, this is contrary to the findings of the long standing China Study which associated rural plant based diets, centred around rice, was associated with a significantly lower incidence of the western diseases of affluence: cancers of the stomach, liver, lung, breast, blood and brain; diabetes and heart disease.

-Could the latter be due to genetic differences in the Asian and western populations in terms of insulin spikes when consuming white rice? Studies have actually shown the contrary – that ethnic Chinese people have even a higher insulin spike when consuming rice compared to western people.

-Could it be that the dramatic increase in diabetes rates in China is more likely associated with a tripling in the consumption of animal foods in recent decades (see chart below)?

-Over the last 20 years, vegetable oil consumption has gone up by 20%, pork consumption has gone up by 40%, energy from fat went up from 24% to 36%, while rice consumption has actually dropped by 30%. At the same time, the incidence of diabetes in China went up from 2.7% ( amongst the lowest levels globally) in 2000 to the current level of 9.7%.

-A study has observed that only after the comparatively recent adoption of high fat Western dietary habits, focussed primarily on animal products and highly processed junk foods, have these chronic illnesses become more prevalent in Asia.

-While some studies have shown that a high consumption of animal protein and fat have been associated with a higher incidence of diabetes, what could be the reason behind the recent spike in the incidence of diabetes amongst the rice eating populations in China and Japan.

-Could it be, as some earlier studies have shown, that adding animal protein to processed carbohydrates like white rice, spaghetti dramatically increases (double and higher depending on the amount of meat cosnumed) the insulin spike (see chart below)?

-This would be consistent with earlier studies which have shown that vegan diets are associated with relatively low daily insulin secretion, but adding animal protein can markedly increase insulin secretion triggered by carbohydrate consumption.

Here’s to eating a whole food diet comprising mainly of whole grains, vegetables, legumes, nuts, fruits and perhaps a little bit of animal protein!



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