Compound Income
  • Blog
  • Scores
    • Scores Presentation
  • Portfolio
    • Table of Returns
  • Resources
    • Check list
  • About
  • Contact
  • New Page



Back to the future Part 3

26/10/2015

0 Comments

 
PictureClick to enlarge
Here we go as threatened / promised is part 3 of this film themed set of posts looking at what we can learn about the future for investing by looking at the past. Since the third Back to the Future film was set in the Wild West this post appropriately will take a look at markets which some categorize as the Wild West given their volatility and propensity for crises.

Since sequels often rehash what has gone before lets start by recapping the first two parts. in the first part we saw that real returns from UK equities have been in the region of 5 to 6% in the last 50 to 115 years. We also explored the fact that we have been in a secular bear market since 1999 as the market was on an extended valuation at that time. This highlighted the importance of the valuation levels in determining future returns. We then went on to look at current valuations in the UK market based on dividend yield data from Capita Asset Services. This suggested, that based on current levels of dividend distributions from UK companies, that in the long term future from here, we might be able to look forward to real returns from UK equities roughly in line with the 5 - 6% long term averages, which is nice.

In the second part I left you in the hands of Professor Hans Rosling to talk about demographics and its effects on countries and their prosperity etc. If you have not had time to watch it (spoiler alert) the summary is that the worlds population will continue to grow before levelling out. Most of the remaining growth is going to come in Africa and the Far East and there are good reasons to believe that many in these regions will continue their journey out of poverty towards greater prosperity as their populations grow and their economies become more developed. 

Essentially the demographic trends seem to be pointing us towards emerging markets, although this is not a new idea although it has been found that investing in the highest growing economies has not always been a recipe for success. See the Global Year Book 2014 which had articles on Emerging markets v developed markets starting on page 5, and high v low growth economies and counter intuitive future investment returns on page 17. So in this third part I thought I would look to the future and see if it might be worth looking to play those demographic trends in emerging markets and maybe other developed markets by examining current valuations of global equities.

With the growth caveat in mind lets think a bit about the history. Emerging markets as an asset class really started to develop and become more mainstream in the late 1980's and early 1990's as far as I remember. However, I guess some pioneering investors, such as the late great Sir John Templeton, were early emerging market investors with their investments in the likes of Japan and Hong Kong before these became mainstream. Indeed in the Global Year Book 2014 which I mentioned above, the professors travelled further back in time to 1900 by defining emerging or developing nations based on GDP per capita being less than $25,000 rather than index provider definitions. This suggested that developing markets, on this definition, had produced annual returns of 7,4% and had underperformed developed markets which had produced 8.3% per annum since 1900.




















These returns were however, hit somewhat (classic English under statement there) by the the 1917 Russian revolution when investors lost everything and a post war collapse in Japan when investors effectively lost 98% in dollar terms! In addition another contributor was China, where markets were closed in 1949 following the communist victory, and where investors in Chinese equities effectively also lost everything. However the authors do point out that from 1950, emerging markets staged a long fight back, albeit with periodic setbacks. From 1950 to 2013, they achieved an annualized return
of 12.5% versus 10.8% from developed markets.

In their current guise what today are known as emerging market according to index providers are often referred to as the BRIC's (Brazil, Russia, China, India) a phrase coined by Goldman Sachs, plus many other Far Eastern and frontier African markets which have been though several rounds of enthusiasm and pessimism and associated booms and busts. Their strongest period of outperformance came in the decade after the developed markets peaked in 1999/2000 after the dot com bubble and as enthusiasm for growth in emerging markets really took hold. They have however, in the last five years or so,  underperformed badly with the MSCI Emerging Markets ETF being down by around 15% versus a rise of 85% for US equities & +15% or so from EAFE equities (developed ex US) over the same period, see chart below. After that I provide some graphics looking at valuations on Global markets and I will discuss the implications of these after these which are:
excellent Asset Allocation resources provided by Research Affiliates. The graphics look at :(1) Shiller PE's on global equities, (2) Expected 10 year risk and returns across different asset classes and (3) Expected 10 year risk & returns for individual equity markets.

Picture
Click to enlarge
Picture
Click to enlarge
Picture
Click to enlarge
Picture
PictureClick to enlarge

At certain times in the past investors have been prepared to pay a premium for emerging markets and then been  disappointed by returns as the natural volatility of these economies and markets kicked in. In fact the important point to remember when investing in emerging markets is that they tend to be much more volatile than developed markets so you need to be prepared to accept that if you are going to invest in them. At other times in the past investors have become very pessimistic about emerging markets after various crises in the Far East and Russia and may be even after the current China crisis if that's what it is. Returns have then tended to be better because, as we learned in part one, future returns obviously tend to driven by the price or valuation you pay at the outset.

It's noticeable that Emerging markets overall and Brazil, China and India are all close to their lows in terms of their Shiller 10 year PE. Meanwhile US equities & Japanese equities look relatively expensive on 25x and 24x while UK and EAFE look more reasonable on 11x & 14x respectively. While CAPE is not necessarily a good short term timing indicator, it does suggest a bias away from US equities and towards other developed and Emerging markets could be good for future returns on your portfolio as per the Real 10 year expected return chart above.






















In passing before I get on to the summary and conclusion it is encouraging / reassuring to see that they also suggest 6% real returns from UK equities over the 10 years confirming what we saw from looking at the Capita dividend based calculation in part 1.

Summary & Conclusion
So far in this series we have seen from studying the past that the price you pay is important for you potential future returns. While a talk on demographics suggests that emerging markets might be a fruitful hunting ground for future growth and increased prosperity, although we also touch on in this part the evidence that rapid GDP growth does not always necessarily lead to above average investment returns, so that is worth bearing in mind too.

However, despite that caveat, the demographics and a look at current valuations suggests that there may some potential from decent future returns from some developed markets and emerging markets going forward in time from here. It is however important to remember that emerging markets are likely to be more volatile than developed markets so you have to be comfortable with that if you are going to consider investing in them.

With that in mind I think I'll go one better than the makers of the original Film series and come back in the future with a part 4 and have a look at ways you can play these areas via London listed vehicles and investment trusts. Still I guess you can never rule out another Back to the Future film because the fashion in Hollywood these days seem to be to re-boot or resurrect old tired franchises - evidence for the prosecution - Jurassic World, Mad Max Fury Road, Terminator Genisis, Star Wars whatever - you get the picture, The End.


0 Comments

Your comment will be posted after it is approved.


Leave a Reply.

    RSS Feed

    Google+

    Archives

    February 2021
    January 2021
    December 2020
    November 2020
    October 2020
    August 2020
    July 2020
    June 2020
    May 2020
    April 2020
    March 2020
    February 2020
    January 2020
    December 2019
    November 2019
    October 2019
    August 2019
    June 2019
    April 2019
    March 2019
    February 2019
    January 2019
    December 2018
    November 2018
    October 2018
    September 2018
    August 2018
    July 2018
    June 2018
    May 2018
    April 2018
    March 2018
    February 2018
    January 2018
    December 2017
    November 2017
    October 2017
    September 2017
    August 2017
    July 2017
    May 2017
    April 2017
    March 2017
    February 2017
    January 2017
    December 2016
    November 2016
    October 2016
    September 2016
    August 2016
    July 2016
    June 2016
    May 2016
    April 2016
    March 2016
    February 2016
    January 2016
    December 2015
    November 2015
    October 2015
    September 2015
    August 2015
    July 2015
    June 2015
    May 2015
    April 2015
    March 2015
    February 2015
    January 2015
    December 2014
    November 2014
    October 2014
    September 2014
    August 2014
    July 2014
    June 2014
    May 2014
    April 2014
    March 2014
    February 2014
    January 2014

    Categories

    All
    32Red
    Aberdeen Am
    Admin
    A G Barr
    Alliance Pharma
    Alternative Telecoms
    AMEC
    Amino Technologies
    Amlin
    Anglo Pacific
    Asset Allocation
    Auto Trader Group
    BA Systems
    BATS
    Behavioural Finance
    Bellway
    Berendsen
    BHP Billiton
    Bloomsbury Publishing
    Bodycote
    Books
    Bovis Homes
    BREXIT
    Britvic
    Catlin-group
    Central Asia Metals
    Centrica
    Character Group
    Churchill China
    Cineworld
    City Of London Investment Group
    Clarkson
    Commercial Property
    Compound
    Computacenter
    Connect Group
    Croda
    Currencies
    Demographics
    Diageo
    Diploma
    Directors Dealings
    Dividends
    Easyjet
    Economics
    Emerging Markets
    Emis
    Empiric Student Property
    Etfs
    Fairpoint
    Ferguson
    Ferrexpo
    Finsbury Foods
    Food Retailers
    Forterra
    Games Workshop
    Gateley
    Go Compare
    Goid
    Greene King
    GSK
    Hargreaves Services
    Hays
    Headlam
    Hedge Funds
    Hill & Smith
    House Builders
    Howden
    HSBC
    IG Group
    Imperial Tobacco
    Indivor
    Inflation
    Insurance
    Intermediate Capital
    Interserve
    Investec
    Investment Trusts
    It
    ITV
    James Halstead
    Jarvis Investment Management
    JLT
    Jupiter Fund Management
    KCOM
    Kingfisher
    Legal & General
    Lloyds Bank
    Maintel
    Man Group
    Market Timing Indicator
    Market Valuation
    Marston's
    Matchtec
    Media
    Merlin Entertainment
    Micro Focus
    Mining
    Mitie
    Miton Group
    Moenysupermarket
    Mondi
    Moneysupermaket.com
    Music
    National Grid
    N.Brown
    News
    Next
    Nichols
    Norcros
    Oil
    Page Group
    Paypoint
    Pennon
    Persimmon
    Personal Finance
    Pharmaceuticals
    Phoenix Group
    Photo Me
    Photo-Me
    Plus500
    Podcasts
    Polar Capital
    Politics
    Portfolio
    Portmeirion
    Provident Financial
    PZC
    Qinetiq
    Ramsdens Holdings
    Rank Group
    Reckitt Benckiser
    Renewable Energy
    Renew Holdings
    Renishaw
    Research Papers
    Restaurant Group
    Retailers
    RIO
    RM Group
    Rolls Royce
    RPC
    RPS
    Safestore
    Sage
    Sainsburys
    Savills
    Schroders
    Scores
    SCS Group
    Sell Discipline
    Shareholder Yield
    Share Picks
    Short Interest
    Somero
    Spectris
    Sprue Aegis
    SSE
    Stock Spirits
    S & U Plc
    TalkTalk
    Taptica
    Tax
    Technology
    Telecoms
    Tobacco
    Trading Ideas
    TSB
    TUI
    UK Market Update
    Unilever
    Utilitywise
    Value
    Victrex
    Vodafone
    VP.
    Water Utilities
    WH Smiths
    William Hill
    Wynstay
    XL Media
    XP Power
    Yield
    Zytronic

    googleda4a17cac6d02bb9.html
    File Size: 0 kb
    File Type: html
    Download File

Powered by Create your own unique website with customizable templates.
  • Blog
  • Scores
    • Scores Presentation
  • Portfolio
    • Table of Returns
  • Resources
    • Check list
  • About
  • Contact
  • New Page