On Why Stay With Emerging Markets?; Dietary Recommendations by the Academy of Nutrition!

From: aditya rana
Date: Sat, Dec 3, 2016 at 2:17 PM
Subject: On Why Stay With Emerging Markets?; Dietary Recommendations by the Academy of Nutrition!
To:

Hi!,

Emerging Markets equity and debt funds have witnessed significant outflows in the aftermath of the US elections, with the US equity market being the main beneficiary. Does this makes sense from a longer term perspective? Rob Arnott and Chris Brightman, CEO and CIO, respectively, of the $165BN fund manager/advisor Research Affiliates (RA), provide their perspective on this topic in their latest monthly update. To summarise:

-RA have a 66 2/3% weighting to international equity markets, and are looking to incrementally increase their exposure to international equities given the meaningful valuation differentials with the US market.

-Over the last three years, the S&P 500 index has delivered real returns of 10.2% per annum, versus non-US DM equities and EM equities returns of 0% and -1.2%, respectively.

-US equities are now priced at a Shiller P/E ratio (i.e., price relative to 10-year earnings) of over 26x, a top decile ranking, matching the peak level just prior to the 2008 financial crisis. While the US economy is the healthiest DM economy in the world, it certainly does not justify a top decline ranking.

-By contrast, non-US DM equities are priced at a Shiller P/E of 14x, which is over 45% cheaper than the US market. EM equities are even cheaper (despite a 16% return YTD Sept), being at a Shiller P/E below 12x, which is a bottom decile ranking. EM equities could double in price tomorrow and still be cheaper than the US market.

-While this value differential is expected to reduce over time (rather than immediately), EM and non-US DM equities also offer higher dividend yields and dividend growth potential in the interim. Currently, DM and EM equities offer expected annual returns of 5.6% and 6.9%, respectively, over the next five to seven years, versus 0.9% for the US market.

-RA 10-year asset class return forecasts have shown a high correlation with subsequent actual returns, with the correlation increasing over time. Over short periods, the actual market returns show a wide dispersion range, but this noise of price changes reduces over time giving way to the structural drivers of long term returns – income yield and income growth.

-For example, the current yield on the Barclays US Aggregate Bond Index has had a 92% correlation with its subsequent 10-year return as exhibited in the graph below.

-The same relationship between yield and return exists in the equity market, with data going back nearly a century. Cyclically adjust earnings yield (i.e., 10-year real earnings per share divided by current price) provides a 75% forecast of subsequent 10-year real returns of the US equity market.

-This relationship arises because cyclically adjusted earnings yield tends to mean revert over time. When the market’s earnings yield was far above the historical average – i.e., the 10-12% yield in the ‘30s-‘40s , and in the ‘70s-‘80s, the subsequent annualized real returns were 15-20%. In contrast, when the earnings yield were 2-3% in the late ‘20s and late ‘90s, the subsequent real returns were zero. Today’s earnings yield of 3.8% (well below the long term average of 6%) implies a 10-year real return of about 1%.

-While the yields on US equities and bonds are depressed by central bank policies, other asset classes provide relatively higher yields. For example the “Third Pillar Assets” to include inflation hedging assets (TIPS, REITS, commodities) , credit (high yield, bank loans) and EM (equities, US$ and local currency bonds), provide an expected excess return of 2-3% over the traditional 60(equity)/40(debt) US asset mix (see chart below).

-Looking over the last twenty years, for periods when the Third Pillar Assets were forecast to provide excess returns of 2-3% over the 60/40 US portfolio, the range of the sequent excess return quartiles narrowed considerably over time and (see exhibit below) with the median return differential in ten years being almost exactly equal to the original forecast.

-Today’s depressed yields for US stocks and bonds, implying a real near-zero return, require investors to look at cheaper and higher yielding assets offering the potential to achieve substantially higher returns.

Excellent summary of the argument to favour higher yielding international assets (EM and non-US DM equities and high yield bonds) over US assets, for patient investors willing to look through the short-term noise and focus on the medium to longer term (5 to 10 years and beyond).

The Academy of Nutrition and Dietetics Publishes Stance on Vegan and Vegetarian Diets:

-Futher corroboration for the benefits of Vegetarian & Vegan diets:

PRCM, Dec 2,2016:

http://www.andjrnl.org/article/S2212-2672(16)31192-3/fulltext

Vegetarian and vegan diets are healthful, may prevent and treat chronic diseases, and are better for the environment, according to the Academy of Nutrition and Dietetics, the world’s largest organization of nutrition professionals. Researchers updated the 2009 position paper on vegetarian diets and concluded that not only are vegetarian and vegan diets appropriate for all stages of the life cycle (pregnancy, infancy, childhood, etc.), but they also help reduce the risk for heart disease, high blood pressure, type 2 diabetes, stroke, obesity, and some types of cancer. The updated position paper presents a section on environmental issues which concludes plant-based diets are more sustainable and less damaging to the environment.

The evidence supporting eating more plants, grains and fruits continues to mount!

Regards,

Aditya

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