On Why Stay Long Indian Stocks; A China Correction?; Live Longer by Reducing Protein Intake!

From: aditya rana
Date: Sat, Jun 20, 2015 at 2:27 PM
Subject: On Why Stay Long Indian Stocks; A China Correction?; Live Longer by Reducing Protein Intake!


With the 11% decline in the BSE index since its peak in early March (after rising 60% from its low in late August, 2013), it is legitimate to question to whether the Indian stock bull market has faltered or even ended. Bearish sentiment abounds, yet the underlying secular case for owning Indian stocks remains intact as persuasively argued by Morgan Stanley in a research report. To summarise:

-Foreign institutional investors have pulled money out of the Indian stock market over the last two months, driven by weak corporate earnings growth and lack of “big bang” reforms. While “big bang” reforms are key to support the longer term growth story, historically India has maintained high growth and low inflation without any “big bang” reforms – instead relying on other key supporting factors which had reversed in recent years.

-The “stagflation” environment of recent years (2011-2013) and the declining productivity of investment (the capital-output ratio increased from an average of 4.0 in 2003-2007 to 6.8 in 2014) was a direct result of the policy mistake of focusing primarily on redistribution at the expense of growth.

-Specifically: high rural growth, increase in the fiscal deficit, negative real rates and corruption scandals causing a stalling of investment approvals led to a noxious mix of low growth and high inflation.

-The unprecedented rise in rural incomes, from 6.4% YoY between 2006-08 to a peak of 21.5% YoY in late 2011 was perhaps the single most important factor leading to a stagflation environment.

-The government had made considerable progress on fixing the above four factors: the ratio of government spending to GDP has declined to 13.3% in early 2015, the lowest in over 30 years; rural wage growth has normalized to previous levels of 5% YoY; real rates are now positive (and even higher than in the pre-2008 period); and, investment approval process/policies have been streamlined.

-The impact of government action on the above four factors has led to a decrease in the capital-output ratio, as well as improvement in two key sets of indicators (macro stability and capex) which point towards continued decline in the capital-output ratio.

Macro Stability: CPI inflation has declined to 5% YoY from 8.3% and 9.3% in the previous two years, and WPI (PPI) has contracted by 2.7% (for the six consecutive month). The current account deficit has narrowed to 1.3% from 1.7% and 4.7% in the previous two years, together with strong capital inflows raising the BOP surplus to 2.7%, the highest level since 2008. The financial sector is slowly stabilising with loan-deposit ratios declining, property prices moderating and new impaired loans peaking.

Capex: Domestic investment is reviving based on an increase in projects under implementation and new projects, a decline in stalled projects, and an increase in capital goods (growing at 16% YoY versus a decline of 10% YoY in 2014 – see chart below). In addition, FDI has spiked up growing by 25% YoY.

-The improving macro picture has not yet translated into a recovery in corporate earnings primarily due to: weak exports which have declined by 14% due to weak global demand, the global disinflationary trend as evidenced by the contraction in the WPI which has generally reduced pricing power of corporates; weak rural growth due to cutback in redistribution spending by the government; high levels of corporate debt in some sectors holding back investment; and, cutback in household spending on real estate with high real deposit rates.

-Private sector capex is likely to be hampered by the above constraints for the next 6-12 months, with the public sector (accounting for 41% of non-household investment) leading the way (see chart below). With respect to infrastructure, the EPC scheme (engineering, procurement and construction) where the financial risk lies with the government and the execution is outsourced to the private sector is a change to the previous BOT (build, operate, transfer) scheme and provides incentives for private companies to bid for projects. For example, 75% of new road projects during this financial year will be awarded under the EPC scheme (see table below).

-The RBI is too cautious in its inflation expectation of 6.4% by March 2016, and they expect CPI inflation to decline to 4.75% driven by low wage growth, cutback in government spending, capex growth rather than government consumption driven growth, higher real rates and subdued commodity prices. If inflation does decline as expected, the RBI could lower rates by 50-75 bps by March, 2016 to maintain their real rate target of 1.5-2.0%.

-While inflation can be adversely affected by weak monsoon (June-September) rains as forecasted, given that food accounts for 45% of the CPI index, and with the summer crop accounting for 50% of total food grain production being dependent on the monsoons (as less than half of farm land is irrigated). The secular drivers behind declining inflation are intact: declining rural wages, lower government spending, weak global commodity prices and subdued food purchase price hikes.

-The main area requiring more aggressive government action is capital infusion in the state-owned banks which has been holding back credit creation in the economy. They estimate public sector banks require $14-15 BN of capital over the next 9-12 months, while the government has recently stated that they plan to increase the infusion to $2.5BN, instead focusing on the longer term structural reforms: management changes, improve operating environment, establishing a bank bureau to improve governance and gradual recapitalization.

-In summary, incoming date and government action supports the view that economy is still on a recovery track, with a stabilizing macro picture and recovery in capex led by the public sector. While corporate revenue growth is weak, this is due to deflationary trends affecting India and the significant cutback in redistribution to the rural sector by the government. Growth should recover to 6.5% (old series) by the end of the third quarter of this year.

A good summary of the key macro factors driving India’s growth in the near-to-medium term. While the “big bang” reforms may take longer than what was expected following Modi’s election last year, we should start seeing improvements in growth as we head into the second half of the year. Given that the stock market is particularly good in anticipating changes and growth expectations, the rally over the last two weeks seems to confirm this expectation. Stay long India!

A China Correction?

-With the 13.5% fall in the Shanghai composite since reaching its post 2007 high on June 13, the pertinent question is whether this heralds the start of the correction anticipated in my newsletter of 6/6? To recap from the newsletter:

“The Economist carried a cover page in a recent issue titled “Flying too high: China’s overvalued stockmarkets” and warned about the “economic dangers of China’s manic bull market”. As the technical analyst firm EWI notes, magazine covers convey conventional wisdom and are seldom (if ever) right in terms of calling an end to a secular bull market, though they can sometimes be right in calling an interim top. So while we are likely to see a correction lasting several weeks (or perhaps even a few months), the next phase of the uptrend should commence subsequent to the correction . Bull markets typically last longer than the bear markets that precede them, and with a bear market which lasted 7 years the bull market has longer to run.”

-In light of the above, for investors already long China probably it is best to stay the course and brave the market volatility, and for investors underweight China it may make sense to take advantage of the correction and start adding exposure rather than trying to pick the bottom. With the Shanghai composite p/e at 23.1 we are not in bubble territory (yet) and the secular bull market case remains intact. As the research firm 13D wrote recently:

“ So, while many talk of the China bubble—largely those who missed it—and certainly prices have advanced too far too fast, it is worth remembering two points. First, China had a long seven-year bear market, while many of the world’s major markets soared to new all-time highs. Second, the true rise of China on the world stage is most

likely—and logically—being reflected in its stock market.

-China accounts for 15% of global GDP, but only about 2.7% of the MSCI All Countries World Index (MSCI ACWI) the global benchmark referenced by many investors. China’s market capitalization is about $10 trillion, the second largest in the world. Daily trading volume in Shanghai and Shenzhen has risen to over 2 trillion yuan ($320 billion per day). As for international (ex-USA) managers, when looking at their positioning versus the most commonly-referenced benchmark, we see a dramatic underweight. According to Morningstar data and a sample of over 200 international (ex-USA) funds managed in the USA, even though the MSCI ACWI ex-USA benchmark has a 4.98% weighting in China, the median manager has an investment of just 1.7%, less than half the index weighting. Are managers simply making up the China shortfall with Hong Kong equities? Apparently not, as the median manager has only 2% in Hong Kong versus the same benchmark’s 2.2% Hong Kong weighting.

-A few years ago, we were the guest speaker at a group of large investors in Europe. We made the case for China and were asked what percentage of a portfolio should be invested there. We answered: “50%”, which was met with peals of laughter, reflecting perfectly the pervasive bearishness that has existed, and continues to exist, in the Western world for China.

-There have been three great bull markets in China since 1992, and we have been actively involved in every one. As we have written often, there is no bull market like a China bull market.”

Living Longer by Reducing Protein Intake:

Dr. Michael Gerber, June 16, 2015:

Many studies have shown that calorie restriction, without malnutrition, can increase lifespan and lower the risk of age-related diseases, such as cancer.

-However, for many people, calorie restriction clearly has its drawbacks. In the classic Minnesota Starvation Study, many of the volunteers suffered a preoccupation with food, constant hunger, binge eating, and lots of emotional and psychological issues. Even researchers who study caloric restriction rarely practice it. There’s got to be a better way

-The breakthrough came when scientists discovered that the benefits of dietary restriction may be coming not from restricting calories, but from restricting protein intake (See my video Caloric Restriction vs. Animal Protein Restriction). If we look at the first comprehensive, comparative meta-analysis of dietary restriction, “the proportion of protein intake was more important for life extension than the degree of caloric restriction.” In fact, just “reducing protein without any changes in calorie level have been shown to have similar effects as caloric restriction.”

-That’s good news. Protein restriction is much less difficult to maintain than dietary restriction, and it may even be more powerful because it suppresses both TOR and IGF-1, the two pathways thought responsible for the dramatic longevity and health benefits of caloric restriction.

-Some proteins are worse than others. One amino acid in particular, leucine, appears to exert the greatest effect on TOR. In fact, just cutting down on leucine may be nearly as effective as cutting down on all protein. Where is leucine found? Predominantly animal foods: eggs, dairy, and meat (including chicken and fish). Plant foods, such as fruits, vegetables, grains, and beans, have much less.

-“In general, lower leucine levels are only reached by restriction of animal proteins.” To reach the leucine intake provided by dairy or meat, we’d have to eat nine pounds of cabbage—about four big heads—or 100 apples. These calculations exemplify the extreme differences in leucine amounts provided by a conventional diet in comparison to a plant-based diet. The functional role of leucine in regulating TOR activity may help explain the extraordinary results reported in the Cornell-Oxford-China Study, “since quasi-vegan diets of modest protein content tend to be relatively low in leucine.”

-This may also help explain the longevity of populations like the Okinawa Japanese, who have about half our mortality rate. The traditional Okinawan diet is only about 10% protein, and practically no cholesterol, because they ate almost exclusively plants. Less than one percent of their diet was fish, meat, eggs, and dairy – the equivalent of one serving of meat a month and one egg every two months. Their longevity is surpassed only by vegetarian Adventists in California, who have perhaps the highest life expectancy of any formally studied population in history.

-Methionine is another amino acid that may be associated with aging. See Methionine Restriction as a Life Extension Strategy to find out which foods to avoid in that case. Both leucine and methionine content may be additional reasons why Plant Protein is Preferable. This all may help explain the results of Harvard’s Meat and Mortality Studies.

Here’s to adding more plants, fruits and whole grains to your diet at the expense of meat, dairy and fish!




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