November 20 – November 26, 2015

Time to load up on Emerging Market equities? Are you aware of the global demographic trends…

Happy Thanksgiving!  This week I’m only going to cover two articles. First was an article discussing whether or not now is the time to get back into emerging market equities by Steve Johnson in The Financial Times “Emerging market equity valuations slide to record low,” and second and of more importance was ““How Demographics Rule the Global Economy”” by Greg Ip in The Wall Street Journal as part of its multimedia 2050 Demographic Destiny collection of articles this week.

*Note: bold emphasis is mine, italic sections are from the articles.

Emerging market equity valuations slide to record low. Steve Johnson. The Financial Times. 19 Nov. 2015.

So the saying goes, when there is blood in the street buy real estate… essentially, the simple (yet emotionally challenging) formula of buy low and sell high. Therefore, now that emerging markets (EMs) have taken a beating, is it time to load up?

“Emerging market equities have delivered a total return of minus 2.1% since the start of 2010, compared with the 69.1% return of developed markets.” 

“The latest leg of correction leaves emerging markets as the unambiguously cheap segment of global equity on a fundamental basis [but], with the exception of Russia, valuations simply haven’t become cheap enough,” says George Iwanicki, emerging market macro strategist at JPMorgan AM.”

“The MSCI Emerging Markets Index fell to a valuation of just 12.8 times 10-year average earnings at the end of September, according to calculations by JPMorgan AM, taking it below the previous nadir of 13.5 times during the 1997-1998 Asian financial crisis.” 

“The cyclically adjusted price-to-earnings multiple is now barely half its long-term average of 25 times average 10-year earnings.” 

“In contrast, the US S&P 500 index is trading at 23.4 times cyclically adjusted earnings, within a whisker of its long-term average of 23.6. The MSCI Europe Index is at 15.1, against an average of 20.6.” 

However, “…emerging market earnings have been elevated for much of the current millennium by high commodity prices and rapid growth in both China and global trade.”

Seemingly it would be a good time to jump in, but…

“The asset class is currently trading on a multiple of 1.43 times book value… While this is below the long-run average of 1.8 times, it is above both the cyclical low of 1.28, recorded in late August, and the all-time low of 0.94 in August 1998.” 

Basically, give it a little more time and no matter what, make sure you have the stomach for it.

How Demographics Rule the Global Economy. Greg Ip. The Wall Street Journal. 22 Nov. 2015.

One of the most powerful immutable forces in our world is demographics, importantly demographics shape trends…

“Next year, the world’s advanced economies will reach a critical milestone. For the first time since 1950, their combined working-age population will decline, according to United Nations projections, and by 2050 it will shrink 5%. The ranks of workers will also fall in key emerging markets, such as China and Russia. At the same time the share of these countries’ population over 65 will skyrocket.” 

“Previous generations fretted about the world having too many people. Today’s problem is too few.” 

“This reflects two long-established trends: lengthening lifespans and declining fertility. Yet many of the economic consequences are only now apparent. Simply put, companies are running out of workers, customers or both. In either case, economic growth suffers. As a population ages, what people buy also changes, shifting more demand toward services such as health care and away from durable goods such as cars.” 

“Demographic forces are assumed to be slow-moving and predictable. By historical standards, though, these aren’t, says Amlan Roy, a demographic expert at Credit Suisse. They are ‘dramatic and unprecedented,” he says, noting it took 80 years for the U.S. median age to rise seven years, to 30, by 1980, and just 34 more to climb another eight, to 38. 

“By 2050, the world’s population will have grown 32%, but the working-age population (15 to 64 years old) will expand just 26%. 

Among advanced countries, the working-age population will shrink 26% in South Korea, 28% in Japan, and 23% in both Germany and Italy, according to the U.N. For middle-income countries it will rise 23%, led by India at 33%. But Brazil’s will edge up just 3% while Russia’s and China’s will contract 21%.” 

This will only compound pension and social security obligations…

“Among rich countries, the U.S. remains demographically fortunate: Its working-age population should grow 10% by 2050. But it will still shrink as a share of total population from 66% to 60%. The demographic drag on growth, in other words, will last decades.” 

“In 2008, the same year Lehman Brothers failed, the first baby boomers qualified for Social Security, and since then, the number of beneficiaries has ballooned, from 41.4 million to 49 million.”

We are going to have to become a whole lot more productive to achieve GDP growth.

Lastly, while I’m not going to go into this article in detail, Ezra Fieser’s “The Town Viagra Built Tries to Move On” in Bloomberg Businessweek provides an example of whether it is better to have a short-term infusion of success/cash – that should theoretically leave you better off – or to never have had it at all…

Other Interesting Articles

Bloomberg Businessweek

The Economist


BloombergBusiness: Calpers Reports It Paid $3.4 Billion to Private-Equity Firms

ConstructionDive: Dodge – Rebound in October construction starts ‘alleviates concern about a stalling expansion’ 11/23

FT: Natural resources prices ‘may fall again’ 11/19

FT: Asian and Russian buyers desert prime London property market 11/19

FT: China police swoop over $125bn in illegal cash transfers 11/20

FT: Beijing’s economic competence questioned 11/20

FT: Chinese developer Evergrande buys life assurer stake 11/23

FT: Chinese-Korean joint venture to mass-produce cloned beef cattle 11/23

FT: Investors psyched by the endowment effect 11/25

FT: Five Disney copycat hotels fined in China 11/25

FT: China’s ‘national team’ owns 6% of stock market 11/26

NYT: LivingSocial Offers a Cautionary Tale to Today’s Unicorns 11/20

NYT: As Investors Shun Debt, Banks Are Left Holding the Bag 11/19

Reuters: Wage pressure coming? U.S. companies start to sound the alarm 11/19

WSJ: Why the Housing Rebound Hasn’t Lifted the U.S. Economy Much 11/22



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