On Grantham’s Market Outlook for 2016; Affluence, Diet and Health!

From: aditya rana
Date: Sat, Mar 5, 2016 at 2:07 PM
Subject: On Grantham’s Market Outlook for 2016; Affluence, Diet and Health!

Hi!,

Following a horrendous start to the year in January, the world MSCI stock index recovered in February by halving its YTD loss to 3%. The start performers this year include last year’s laggards – Brazil (+13%), Turkey and Russia (both up 8%), with last year’s top performers Japan and Shanghai both posting negative returns (-11% and -18% respectively). So what does the year ahead bode for equity markets? During uncertain times like these, it is important to pay heed to the wisdom of market veterans like Jeremy Grantham, co-founder of the famed value investment form GMO. To summarise his latest quarterly note (https://www.gmo.com/) :

-The positive effects of low resource prices are being vastly underestimated and the global economy is likely to be significantly better this year than implied by the current pessimistic forecasts.

-The US and global stock markets are not in a bubble and therefore unlikely to suffer a major crash, and are likely to perform better going forward this year.

-Looking back at 2015, markets were supported by the Fed and other central banks, which more or less offset the three negatives of weaker China GDP growth, plunge in oil prices and declining profit margins.

-The US economy is likely to post higher (2.5%) than the long term trend growth of 1.5% driven by the lagged but huge benefits of low resource prices, and excess capacity both in labour and industry, reducing the risk of a major market correction.

-Though the US market is overvalued by 50 to 60% implying expected real returns of almost – 2%, a major crash is likely only after the US is well into bubble territory supported ably by the Fed and other central banks.

-All great investment bubbles in history have reached or broken though the 2-standard-deviation overvaluation level (2-sigma), which requires a 20% higher level (2300 for the S&P index). In addition, the bubble peaks of 1929 and 2008 were associated with over 1-sigma overpricing of international markets which is currently not the case. Lastly, bubble peaks are characterized by excessive investor optimism which is clearly lacking today.

-The points in favour of a bear market this year are: 1) the outperformance of a small group of blue chips versus riskier stocks during 2015 (though this has happened in a flattish rather than rising market which weakens the indicator); 2) the record number of corporate acquisition deals supported by low rates and lack of investment opportunities; and, 3) the infamous January effect which states that the market performance during the first five trading days of the month (as well as for the whole month this year) predict the performance of the market for the year.

-So while a normal bear market could occur this year (and we were almost there in January), the BIG ONE is unlikely as a fully-fledged blow-off is missing. The current environment pales in significance when compared to 2007, when a major bank failed (as predicted in July 2007), oil and other resources were at all time highs (versus currently being near the lows), a massive housing bubble (a 3-sigma event) versus being moderately overpriced currently, and excess capacity in the broad economy.

-The sharp drop in the world’s most important resource, oil, is helping to drag other commodity prices down with it. The cheap price of resources is like a tax cut for individuals financed by the profits of oil companies and OPEC. While over the long run there is an apparent balance between the winners and losers, in the short term the oil companies and oil-producing countries take their hits upfront by reducing investment, cutting national budgets and reducing their foreign buying which negatively affect economic expectations.

-Historically, oil-producing countries have usually adjusted supply to maintain control over oil prices. Saudi Arabia has probably made the biggest economic error in the history of oil by maintaining supply at high levels, and if the motivation to do this was political, it had better be important enough to offset the damage done to the stability of their economy, politics and social cohesion. The psychological response by the market to this increased uncertainty in the OPEC world is understandable.

-Barring a major political event, the negative economic consequences of low resource prices in the form of responses from the major oil producing companies are largely behind us. What is forthcoming is the consumer response as everything we buy has cheaper input costs. For the median wage earner, few things could match the bonanza from low oil prices in terms of lower outlays for gasoline (a major cost item) and lower heating costs.

-Market opinion is currently obsessed with the early negative bank and credit implications of low oil prices,

while ignoring the delayed (from an understandable increase in savings) stimulus effect and is thereby underrating what is likely to be an important tailwind for the economy in the ensuing quarters. The US economy, with excess capacity in the labour market (due to the ultra low participation rate) and in the industrial sector (at 76.5% which is 3.5% below the 40 year average), is particularly well positioned to benefit from this with positive implications for the global economy as well.

-A clear and insightful piece which stands in contrast to the current markets fears about an impending recession/bear market/crash. With the global stimulus currently being provided by central banks, the Fed likely to be on hold until the second half of this year, more aggressive easing by the ECB next week and the all important China monthly money supply running at a robust 14%, markets are likely to build on the February rally into the summer. As highlighted in previous letters, cash raised from taking some money off the table late last year could be redeployed slowly into the market.

Affluence, Diets and Health?

Yet another great piece from Dr. David Katz, Director of the Yale University Research Prevention Centre on the alarming trend of rising affluence in the developing world leading to unhealthy diets and a resulting higher incidence of chronic diseases, in contrast to the affluent segment in the developed world opting for healthier diets:

Huff Post, Feb 22, 2016:

-The True Health Initiativeis an effort toaccelerate the development of a global communication campaign to convey the evidence and consensus-based fundamentals of healthy living, and notably, healthy eating. In particular, it supports a rigorous evaluation so that we could demonstrate the replacement of widespread confusion and doubts about consensus related to healthful, sustainable eating at baseline, with clarity and understanding by virtue of our efforts.

-The True Health Initiative is global. It calls for targeted interventions, aimed at raising awareness, in five or more countries around the world. Those countries were chosen to represent both places where the so-called "Western" diet is long established, such as the U.S., England, and Australia; and places where that diet is fast replacing local traditions in the wake of cultural transition, such as China, India, and much of the Middle East.

-While working on this project, and thinking about its geographic scope, something odd to the point of paradoxical kept pestering me. In the U.S. and much of the long-industrialized world, one of the principal risk factors for obesity, and attendant metabolic mayhem, is poverty. In the U.S., the fattest and sickest among us tend to be the poorest, while affluence is a robust, if imperfect, defense against obesity and related chronic diseases.

-In contrast, in the fast-developing countries, including but not limited to the massive populations in India and China, the situation is just the reverse. Affluence, at the population level, is propagating the tidal wave of obesity and chronic disease by which these nations are being engulfed. Within those populations, the most affluent are first in line to acquire the very morbidities that extract the greatest toll of years from lives and life from years, and which we have been striving for decades to overcome.

-How can it be that affluence, at the same time but in different places, is both apparent impediment, and invitation, to obesity, diabetes, and so on? I believe the one word answer is adaptation, and there is a glimmer of genuine hope in it.

-No defenses, I go on to say, save one: great, big Homo sapien brains. We have the potential, at least, to think ourselves out of this mess of our own devising. The Western diet, alternatively known, here at least, as the "typical American diet," or "standard American diet" (referred to, aptly, as SAD) is a public health disaster. Despite all the noisy debate over whether its ills are a product of sugar, saturated fat, or something else, the simple reality is that it is a diet of dubious foods and drink in misguided combinations and excess. Its liabilities include both saturated fat and sugar, and are by no means limited to them.

-But it is tasty to a species long adapted to crave sugar, salt, and fat. So when we can first get our hands on it, we do- and greedily. That’s just what is going on now in China, India, South Africa, Qatar and elsewhere, with rather calamitous consequences.

-Here, though, at the epicenter of this mayhem, we have had some time to habituate. Those with the most resources, inevitably the affluent, are starting to mount a defense. The wealthy and well educated are seeking, and finding, alternatives to a diet of hyper-processed grains, added sugar, soda, meat, butter, and cheese. The resource-rich are finding their way first, past the obstacles in our culture, to a diet of wholesome foods, mostly plants, in sensible combinations

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