On Long Term Expected Returns – DM vs EM; Insulin Spikes!

From: aditya rana
Date: Sat, Sep 17, 2016 at 11:34 AM
Subject: On Long Term Expected Returns – DM vs EM; Insulin Spikes!


With global markets taking a breather this month (MSCI world stock index down 1.3%) from their relentless surge over the previous few months, it would be helpful to take a look at expectations for longer term returns. John Bogle, the founder of the world’s largest provider of mutual funds ($3.6 trillion) Vanguard, gave a recent interview where he discussed a simple, and useful, method for estimating long term stock market returns. To summarise (via Ben Carlson):

-John Bogle: “I have a reasonable expectations kind of formula that I’ve been using for 25 years and it’s worked the whole 25 years almost perfectly. There’s some decades where it doesn’t work as well as it should but for the full period the reasonable expectations have been almost exactly the same as the returns actually delivered by the S&P 500. And it’s a simple system.”

-“And that is you’ve got a dividend yield that’s 2%. Going back a long time it was four and a half or five percent, so there’s a loss right there, suggesting lower returns in the future. Earnings growth has been about 5%. I think it’s going to be very tough to do that in the future, maybe we can do 4%. And stocks are highly priced. The first two are what I call investment aspects of the investment return and the second one is the speculative return — that is what will people pay for a dollar’s worth of earnings. “

-Bogle’s formula is this:

Future Market Returns = Dividend Yield + Earnings Growth +/- Change in P/E Ratio

-The formula currently gives him an estimate of stock market returns in the 4-6% range, well below the long-term average that falls in the 8-10% range.

-Looking back at how this formula has worked since 1900 (see table below):

-Dividend yields are much lower now than the were in the past (something that can be partially explained by the increase in share buybacks) while earnings growth and the P/E multiple expansion or contraction have been somewhat more volatile.

-What’s interesting here is how inconsistent the change in P/E has been decade-to-decade. At times high earnings growth has led to multiple expansion while other times it led to a contraction in the multiple people were willing to pay for earnings. Fundamentals matter over the very long-term but even over decade-long stretches investor sentiment can trump all. And the reason for this is because the P/E change is really a gauge of investor sentiment or emotions.

-When investors are feeling good they are willing to pay a higher multiple of earnings for stocks. When they are feeling nervous they are willing to pay a lower multiple of earnings for stocks. The problem with trying to forecast stock returns is that you’re really trying to guess how people will feel in the future.

-Bogle again “I can’t forecast the future, let’s be honest about that. But I can make judgments using reasonable expectations about the future and it seems to me the handwriting is on the wall for lower returns than we’ve had historically.”

-And that’s all you can really hope for as an investor when dealing with an uncertain future.

A very helpfu​l, and yet simple​,​framework to think about expected returns, and which makes the case for EM stocks (versus developed markets) over the longer run compelling. As the chart below from Templeton illustrates rather clearly, EM returns (in $s) over the long run have vastly outpaced those of developed markets, driven largely by the significantly higher earnings growth (arising from higher economic growth), and rerating of the P/E multiple in favour of EM as institutional investors allocate more capital to EM (see comment below). True, that they have exhibited more volatility (driven by a widely fluctuating P/E as they have fallen in and out of favour with global investors), but for patient investors, downturns should be viewed as an opportunity to accumulate cheap assets (and not pay heed to forecasts of an impending EM blow-up during those times!) Active investors can further enhance returns by also lightening up on EM assets when sentiment is euphoric and valuations are stretched(i.e. 2007).

-The case for increased allocation for EM assets from developed markets is illustrated by this recent observation by the CIO of Reliance Mutual Fund (one of India’s top performing funds). “I met the CIO of one of the large pension funds stationed in Montreal in May. The bottom line was that they had to generate 6-7 percent returns to fulfil their pension obligations. The world is such that they are not even able to generate 2 percent and they were looking at countries which had relatively stable currency, which were able to give them 11-12 percent on a longer timeframe and where they could invest in size (like India).”

– Probably the biggest catalyst for this swing in sentiment from 2015 has been a stabilizing China. As noted by Mark Mobius from Templeton: “ Despite the many ailments in the economy, there are also many strengths fostered by China’s economic rebalancing, including growth in consumption driven by rising wages, an expanding services sector (see chart below) and new infrastructure initiatives launched by the central government.”

On Insulin Spikes:

Another great piece from Dr. Michael Greger which dispels some myths relating to insulin spikes from different diets.

www.nutritionfacts.org , September 6, 2016:

Much of the low-carb and paleo reasoning revolves around insulin. To quote “carbohydrates increase insulin, the root of all evil when it comes to dieting and health.” So, the logic follows that because carbs increase insulin, we should stick mostly to meat, which is fat and protein with no carbs; so, no increase in insulin, right? Wrong.

-We’ve known for half a century that if you give someone just a steak: no carbs, no sugar, no starch; their insulin goes up. Carbs make our insulin go up, but so does protein.

-In 1997, an insulin index of foods was published, ranking 38 foods to determine which stimulates higher insulin levels. Researchers compared a large apple and all its sugar, a cup of oatmeal packed with carbs, a cup and a half of white flour pasta, a big bun-less burger with no carbs at all, to half of a salmon fillet. The meat produced the highest insulin levels.

-Researchers only looked at beef and fish, but subsequent data showed that that there’s no significant difference between the insulin spike from beef, chicken, or pork—they’re all just as high. Thus, protein and fat rich foods may induce substantial insulin secretion. In fact, meat protein causes as much insulin release as pure sugar.

– It is true that having hyperinsulinemia, high levels of insulin in the blood like type 2 diabetics have, is not a good thing, and may increase cancer risk. But if low-carb and paleo dieters stuck to their own insulin theory, then they would be out telling everyone to start eating plant-based. Vegetarians have significantly lower insulin levels even at the same weight as omnivores. This is true for ovo-lacto-vegetarians, lacto-vegetarians, and vegans. Meat-eaters have up to 50% higher insulin levels.

-Researchers from the University of Memphis put a variety of people on a vegan diet (men, women, younger folks, older folks, skinny and fat) and their insulin levels dropped significantly within just three weeks. And then, just by adding egg whites back to their diet, their insulin production rose 60% within four days.

-In a study out of MIT, researchers doubled participants’ carbohydrate intake, and their insulin levels went down. Why? Because the researchers weren’t feeding people jellybeans and sugar cookies; they were feeding people whole, plant foods, lots of whole grains, beans, fruits, and vegetables.

-What if we put someone on a very-low carb diet, like an Atkins diet? Low carb advocates, such as Dr. Westman, assumed that it would lower insulin levels. Dr. Westman is the author of the new Atkins books, after Dr. Atkins died obese with, according to the medical examiner, a history of heart attack, congestive heart failure, and hypertension. But, Dr. Westman was wrong in his assumption. There is no significant drop in insulin levels on very low-carb diets. Instead, there is a significant rise in LDL cholesterol levels, the number one risk factor for our number one killer, heart disease.

-What about the paleo diet? The paleo movement gets a lot of things right. They tell people to ditch dairy and doughnuts, eat lots of fruits, nuts, and vegetables, and cut out a lot of processed junk food. But a new study published in the International Journal of Exercise Science is pretty concerning. Researchers took young healthy people, put them on a Paleolithic diet along with a CrossFit-based, high-intensity circuit training exercise program.

-If you lose enough weight exercising, you can temporarily drop your cholesterol levels no matter what you eat. Just losing weight by any means can lower cholesterol, which makes the results of the Paleo/Crossfit study all the more troubling. After ten weeks of hardcore workouts and weight loss, the participants’ LDL cholesterol still went up. And it was even worse for those who started out the healthiest. Those starting out with excellent LDL’s (under 70), had a 20% elevation in LDL cholesterol, and their HDL dropped. Exercise is supposed to boost our good cholesterol, not lower it.

-The paleo diet’s deleterious impact on blood fats was not only significant, but substantial enough to counteract the improvements commonly seen with improved fitness and body composition. Exercise is supposed to make things better. On the other hand, if we put people instead on a plant-based diet and a modest exercise program, mostly just walking-based, within three weeks their bad cholesterol can drop 20% and their insulin levels 30%, despite a 75-80% carbohydrate diet, whereas the paleo diets appeared to “negate the positive effects of exercise.

Here’s to sticking with tried-and-tested dietary traditions and ignoring the new dietary fads!




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