On The Impact of Inflation on Equity Returns

“The way to crush the bourgeoisie is to grind them between the millstones of taxation and inflation.”

– Vladimir Lenin

The S&P 500 closed at 1,977 yesterday. The index has more than doubled from the lows reached in March 2009 at the peak of the global financial crisis. For the first time it crossed the 2,000 mark in August and earlier this month reached a new record of 2,019. According to an article in UK-based MoneyWeek magazine S&P 500 has hit over 30 new record highs this year.

These records may seem fantastic at face value. However when inflation is taken into consideration and the S&P 500’s returns are reviewed in terms of real returns, the soaring index values does not mean much. In fact, quoting Gene Epstein of Barron’s the article notes that the S&P 500 is actually 5% below the previous inflation-adjusted, all-time high reached in March 2000.

Click to enlarge

Real Returns of S&P 500, Down and NASDAQ from 2000 Peak

Source: Chart of the week: Rain falls on the bulls’ parade, MoneyWeek, 9/26/14

From the article:

The S&P 500 previously hit an inflation-adjusted, all-time high in March 2000. Since then, US inflation, as measured by the Consumer Price Index (CPI), has climbed by almost 40%. Factoring that in transforms the previous record to 2,124, notes Epstein, and the market is still more than 5% below this milestone.

Meanwhile, the technology-heavy Nasdaq Composite has done far worse in real terms since 2000; investors in the Dow Jones index, on the other hand, have managed to make a small profit.

So for example an investor holding equities in the form an index fund mirroring the S&P 500 from March 2000 has had a negative return when inflation is included. However in general most investors do not pay much attention to analyze their returns accounting for adverse effects of inflation. The above chart brutally makes it clear that despite being the market for 15 years the investor did not even make a positive real return.

According to one estimate, the value of the US dollar has fallen by 38.1% since 2000. Hence an item that cost $100 in 2000 would cost $138.13 today. To put it another way, the government has destroyed the purchasing power of the dollar by an astonishing 38% during this short-term time period.  Over decades the dollar has lost most its value. The following chart shows the decline in purchasing power of the dollar from 1900 thru 2010:

Purchasing Power of US Dollar since 1900

Source: The Decrease in Purchasing Power of the U.S. Dollar Since 1900,  April 21, 2011, Observations Blog

Related ETFs:

Disclosure: No Positions

Comparing Emerging Market Dividend Payout Ratios To U.S. Dividend Payout Ratios

In an earlier article I discussed about the decline in the dividend payout ratios of U.S. companies. In this post let us take a look at how dividend payout ratios in the emerging markets compare to that of U.S. dividend payout ratios.

Many investors in the developed world have the misconception that emerging market equities are not great dividend payers. However that is not entirely true.There are plenty of emerging stocks that have decent dividend yields that are comparable to their peers in the developed world. Some of these emerging companies even have higher dividend growth rates. In general unlike the developed markets, emerging markets have a much bigger universe of companies to choose from and companies are growing and competing fiercely in order to attract investors’ capital. One way some of these firms compete is by sharing a higher portion of their earnings with shareholders by establishing strong dividend payout policies and following them. In fact, some of the firms in Asia that did not pay a dividend before are starting to pay dividends as they embrace the dividend culture that is common in developed markets. As more and more companies from developing countries become global multinationals and their profits grow, they are highly likely to reward shareholders by increasing their dividend payout ratios.

Investors may be surprised to learn that dividend payout ratios of emerging markets are comparable to that of the U.S. dividend payout ratios as represented by the S&P 500 and MSCI Emerging Markets Index.

Click to enlarge

Dividend Payout Ratios - Emerging vs. US


Source:  Dividend Growth in Emerging Markets, Emerging Global Advisors

Hence investors looking to add dividend stocks can also consider emerging market dividend stocks. This does not mean investors should rush into these stocks. Since emerging markets will always be more volatile than developed markets and they are riskier it is wise to allocate only a small portion of one’s income part of a portfolio to emerging stocks.

Developing markets such as Chile, Taiwan, South Africa , etc. are better for dividends than others such as South Korea or Russia. In addition to country selections, it is also important to be highly selective when hunting for income stocks in developing markets.

Ten dividend stocks from emerging markets are listed below to consider for potential investment opportunities:

1.Company: Standard Bank Group (SGBLY)
Current Dividend Yield: 4.39%
Sector: Banking
Country: South Africa

2.Company:Taiwan Semiconductor Manufacturing Co Ltd (TSM)
Current Dividend Yield: 2.48%
Sector: Semiconductors & Semiconductor Equipment
Country: Taiwan

3.Company:China Mobile Limited (CHL)
Current Dividend Yield: 3.37%
Sector: Telecom
Country: China

4..Company:Banco Santander- Chile (BSAC)
Current Dividend Yield: 4.44%
Sector: Banking
Country: Chile

5.Company: China Petroleum & Chemical Corp. (SNP)
Current Dividend Yield: 4.33%
Sector: Oil & Gas
Country: China

6.Company: Ultrapar Participacoes SA (UGP)
Current Dividend Yield: 2.78%
Sector: Oil, Gas & Consumable Fuels
Country: Brazil

7.PT Telekomunikasi Indonesia Tbk (TLK)
Current Dividend Yield: 2.90%
Sector: Telecom
Country: Indonesia

8.Company: Empresa Nacional de Electricidad SA (EOC)
Current Dividend Yield: 2.66%
Sector: Electric Utilities
Country: Chile

9.Company: CPFL Energia SA (CPL)
Current Dividend Yield: 5.59%
Sector: Electric Utilities
Country: Brazil

10.Company:Philippine Long Distance Telephone Co (PHI)
Current Dividend Yield: 3.88%
Sector: Telecom
Country: Philippines

Note: Dividend yields noted above are as of Sept 26, 2014. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions.

Disclosure: Long UGP

Infographic: 10 Facts About The Single European Market

In 2012, the EU celebrated the 20th anniversary of the establishment of the Single European Market. The combination of all the European markets into a single one has been a highly successful project.Today the EU market is a huge and is comparable to the US market. As a single entity Europe is also able to not only compete with the U.S. but also against rising economies such as China, Brazil, India, etc. For example, Airbus Group N.V. (EADSY) is able to compete against US-based The Boeing Company (BA) effectively in the global marketplace.Without the single market this would not have been possible.

A few years ago during the sovereign debt crisis in Greece and other countries it seemed that this successful project would come to an end. However fortunately the European Union did not break up and continues to move forward.

The following is a cool infographic I came across at Deutsche Bank Research site:

10 Facts About The Single European Market


Source: Deutsche Bank Research

A pdf document listing the main achievements of the Single European Market can be found here. Additional details on the Single European Market is available at the European Commission site.

Disclosure: No Positions

Financial Asset Class Types Held By Latin American Households

The financial assets held households can be of many types including bank savings deposits, insurance policies, pensions, bonds, stocks, etc. Usually households’ total financial assets is split between a variety of asset classes. Globally the percentage split among the asset classes vary from region to region and even country to country. For instance, Germans are big savers in terms of bank deposits and do not prefer to hold stocks. But generally Americans prefer stocks to bank deposits. The reasons for this difference between two countries can be attributed to many factors including culture, tax policies, interest rates, etc.

In this post lets take a quick look at how Latin American households’ financial assets are divided among the various asset classes.

Click to enlarge

Financial Asset Classes in Latin America

Source: Allianz Global Wealth Report 2014, Allianz

Among Latin American countries, households in Argentina have the highest percentage of their financial assets in bank deposits. Argentines have just 9% of their total financial assets in stocks which are risky. Households in Mexico, Brazil and Chile have low percentage of bank deposits compared to other asset classes.Mexicans and Brazilians have the highest percentage of their assets in stocks at 66% and 43% respectively. Households in Chile have the highest percentage of their financial assets in insurance and pensions due to government regulations there.

Also checkout:

More on this topic (What's this?) Read more on Investing in Latin America, Banking at Wikinvest

Which Companies Are The Top Global Healthcare Companies by Market Capitalization?

The global healthcare  industry is a multi-billion dollar industry. Companies in the healthcare industry are enjoying rising demand for their products not only in the developed world also in the emerging world. In the developed world people are living longer and also falling ill more. In the emerging countries, higher stress levels and change in food consumption habits is driving the demand for healthcare. As consumers in developing and frontier countries increasingly abandon their traditional foods and eating habits and switch to Western foods many of the diseases such as diabetes, cancer, obesity are becoming more prevalent in those countries.

The following are the Top Global Healthcare Companies that appeared in the Global Top 100 Companies by Market Capitalization report published by PricewaterhouseCoopers earlier this year. Investors looking to add stocks in this sector can consider this list as a starting point for further research.

1.Company: Johnson & Johnson (JNJ)
Current Dividend Yield: 2.58%
Country: USA

2.Company: Roche Holding AG (RHHBY)
Current Dividend Yield: 2.99%
Country: Switzerland

3.Company: Pfizer Inc (PFE)
Current Dividend Yield: 3.47%
Country: USA

4.Company: Novartis AG (NVS)
Current Dividend Yield: 2.97%
Country: Switzerland

5.Company: Merck & Co Inc (MRK)
Current Dividend Yield: 2.95%
Country: USA

6.Company: Sanofi (SNY)
Current Dividend Yield: 3.42%
Country: France

7.Company: GlaxoSmithKline (GSK)
Current Dividend Yield: 5.64%
Country: UK

8.Company: Gilead Sciences Inc (GILD)
Current Dividend Yield: N/A
Country: USA

9.Company: Amgen (AMGN)
Current Dividend Yield: 1.74%
Country: USA

10.Company:Bristol-Myers Squibb Co (BMY)
Current Dividend Yield: 2.79%
Country: USA

11.Company: AbbVie Inc (ABBV)
Current Dividend Yield: 2.85%
Country: USA

12.Company: Novo Nordisk A/S (NVO)
Current Dividend Yield: 2.97%
Country: Denmark

Note: Dividend yields noted above are as of Sept 25, 2014. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions.

Disclosure: No Positions

Why European Stocks Are Attractive Now

The equity markets of major European economies have lagged the performance of the U.S. market so far this year. The year-to-date returns of the main European markets as of Sept 22nd are listed below:

UK’s FTSE 100: 0.4%
France’s CAC 40: 3.4%
Spain’s IBEX 35: 10.4%
Germany’s DAX: 2.1%

U.S. stocks have performed very well relatively with the S&P 500 up 7.9% as of Sept 22, 2014.

A few years ago Europe went thru a series of crises mainly affecting Greece, Spain, Ireland, Iceland and Portugal. Dire predictions of the collapse of the European Union, the Euro, social unrest, permanent recession, etc. did not occur. The many bailouts of the ECB and quick policy reforms implemented by by respective governments have helped countries recover from the depth of the crisis. While Europe was able to recover form those crises, in the past few months new issues have hit the EU member countries. These include trade sanctions against Russia, war in Ukraine, Scotland referendum, etc. Structural problems like high unemployment still persist in Greece, Italy and other countries. But overall European economies are recovering and European firms are growing again. Cash-rich German companies for instance are acquiring other firms including some in North America in order to take advantage of growth opportunities.

Though U.S. stocks have outperformed European stocks until now, European companies have better growth prospects moving forward than their American peers according to are report by Barclays.

From the report:

Earnings upside
A large part of this story relates to the greater relative upside for European corporate earnings relative to their developed market peers. (Figure 7) This is a function of the banks’ plight, and the more geographically constrained mid- and small-cap universe. As both the European and global economies continue to improve, we likely will see European corporate earnings benefit. (Figure 8)

Click to enlarge

Europe v US EPS Chart


The case for European equities is finely balanced. Incoming economic data remains uninspiring at best, and the prospects for further sanctions against Russia are unlikely to be helpful. However, gradually thawing domestic credit markets, a process helped by the ECB’s various measures, alongside a brisker global economy, are among the reasons that suggest European equities remain attractive.”

Source: Compass, September 2014, Barclays

Ten European stocks outside of the U.K. are listed below for consideration:

1.Company: Siemens AG (SIEGY)
Current Dividend Yield: 3.33%
Sector: Industrial Conglomerates
Country: Germany

2.Company:Air Liquide (AIQUY)
Current Dividend Yield: 2.50%
Sector: Chemicals
Country: France

3.Company: Danone SA (DANOY)
Current Dividend Yield: 2.88%
Sector:Food Products
Country: France

4.Company: Edp Energias De Portugal SA (EDPFY)
Current Dividend Yield: 5.66%
Sector: Electric Utilities
Country: Portugal

5.Company: Nestle SA (NSRGY)
Current Dividend Yield: 3.23%
Sector: Food Products
Country: Switzerland

6.Company: BASF SE (BASFY)
Current Dividend Yield: 3.81%
Sector: Chemicals
Country: Germany

7.Company: Allianz SE (AZSEY)
Current Dividend Yield: 4.14%
Country: Germany

8.Company: AXA Group (AXAHY)
Current Dividend Yield: 4.39%
Sector: Insurance
Country: France

9.Company: Telefonica SA (TEF)
Current Dividend Yield: 3.50%
Sector: Telecom
Country: Spain

10.Company:Eni SpA (E)
Current Dividend Yield: 6.28%
Sector:Oil, Gas & Consumable Fuels
Country: Italy

Note: Dividend yields noted above are as of Sept 23, 2014. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions.

Disclosure: Long AXAHY

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