Knowledge is Power: International Diversification, FX Reserves, Happiest Country Edition



World GDP Change Over The Past 200 Years

One of the key strategies for success in investing is diversification. It involves not just investing in various asset classes in  a single country but a good diversified portfolio should include a variety of assets spread over many regions or countries. Global diversification in the equity portion of a portfolio is important since equity markets’ performance vary wildly from one country to another every year. For example, U.S. equities were star performers compared to European stocks. But this year, European stocks are handily beating their U.S. peers at so far.

The long-term performance of equity markets is related to the economic performance of a country or region. Over the years, the economic power of countries have changed. The chart below shows how the share of world’s GDP has changed over the past 200 years:

World GDP Change in 200 Years

Source: Mastering Global Diversification: What the Masters Tells Us About the Markets by Jeffrey Klientop, April 15, 2015 Charles Schwab

Today emerging markets of China and India were developed markets 200 years ago when they accounted for 50% of the world’s economic output. Even Brazil was also a rich in the 19th century when the boom in rubber demand helped its economy. The beautiful Amazon Theater in Manaus in the hear of the Amazon rainforest was built during that time. However Malaysia took over the leading producer of rubber when some rubber plants were taken to that country to establish a plantation by a man. This led to the decline in the wealth of Brazil.

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Amanzon Theater

The Amazon Theater, Manaus, Brazil

The chart above also shows that the U.S. was a tiny emerging country back in the 1800s. At that time, the country was neither a military nor an economic superpower. The share of Europe’s economic output as a percentage of the world’s GDP has also declined since the late 1900s.

The key takeaway is that economic growth shifts over the years and hence today’s emerging countries could one be tomorrow’s developed countries.

Related ETFs:

  • iShares MSCI Brazil Index (EWZ)
  • iShares S&P India Nifty 50 (INDY)
  • iShares FTSE/Xinhua China 25 Index Fund (FXI)
  • SPDR S&P 500 ETF (SPY)

Disclosure: No Positions

A Note on the Unemployment Rates in Europe

The unemployment rate remains high especially in select European markets. For example, Germany has the lowest rate and the rates continues to decline. While the unemployment rate in Germany and Spain are declining, France and Italy it remains stubbornly high and is not declining. According to a report by Natixis, a jobless recovery is currently occurring in France. The following charts show the contrast in unemployment rates in the four largest Eurozone economies:

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Europe Unemployment Rate

Source: Jobless recovery? by Patrick Artus, Natixis

The chart below shows the latest unemployment rates in the EU:


Source: Eurostat

The unemployment rate was just 4.8% in Germany in February. The highest rates were in Greece and Spain respectively at 26% (in December, 2014) and 23.2% respectively.

The following chart shows the comparison of unemployment rates in the US, Japan and Europe over the years:

Unemployment_rates_EU-28_EA-18_US_and_Japan_February _2015

The Germany unemployment rate is closer to the U.S. rate. The US rate in February was 5.5%.

Are British Financials Worth A Look Now?

The FTSE 100 has been a laggard this year compared to other European indices. The FTSE is up by 6.5% so far this year while the DAX, CAC 40 and others have shot up by digit percentages. This is because the FTSE is heavily concentrated in resource sector such as the oil and mining, consumer goods, financials and healthcare. These firms depend on emerging markets for the majority of their revenues. As these markets are under-performing the FTSE is impacted adversely as well.

British banks and related firms in the financial sector have been hurt badly during the global financial crisis. In addition, the recent foreign exchange currency probes also have pulled the share prices of bank stocks down further. Despite the problems faced by this sector, troubles are in the past and better days lie ahead. The financial sector is one of the three sectors preferred by Martin Walker, Portfolio Manager of Invesco Perpetual UK Growth fund according to an article in FE Trustnet today. Other than financials, he likes companies in the oil and mining industries.

From the article:


The final sector on the list is banks, which Walker says are an obvious winner from a brightening macroeconomic backdrop.

“HSBC is really interesting and I own Lloyds – though I’m a bit twitchy about it going into the election because of the politics. However, it too looks interesting and it could pay a big dividend, but that is fairly well-known.”

“I’ve also been buying Barclays and I still have significant positions in non-bank financials like Legal & General.”

Banks, following huge falls during the financial crisis and the PPI scandal, went through a rebound period during the risk-on markets on 2012 and 2013.

However, with a hotly contested election on the cards and the banking system one of the major battle grounds, the outlook for the sector looks uncertain over the short term. Walker is willing to look past this, however, as he thinks they will continue to perform well for him.

HSBC is the one stock Walker is most excited about within the sector, though, as he says it is very lowly valued despite its global presence.

Source: Invesco’s Walker: The three UK sectors investors should buy to protect themselves, FE Trustnet

British banks trading on the US markets are listed below for consideration:

1.Company: HSBC Holdings PLC (HSBC)
Current Dividend Yield: 5.57%

2.Company: Barclays PLC (BCS)
Current Dividend Yield: 2.63%

3.Company: Standard Chartered PLC (SCBFF)
Current Dividend Yield: 6.02%

4.Company: Bank of Scotland Group PLC (RBS)
Current Dividend Yield: No dividends paid

5.Company: Lloyds Banking Group PLC (LYG)
Current Dividend Yield: 0.96%

Some of the other financials that investors can review include insurers Aviva(AV), Prudential(PUK), Old Mutual (ODMTY) , Standard Life (SLFPY) and Legal & General(LGGNY).

Note: Dividend yields noted above are as of Apr 20, 2015. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions.

Disclosure: Long LYG, LGGNY

Fountain, Washington DC

Fountain, Washington DC

On the Continuous Rise of College Tuition in the U.S.

The cost of college education continues to increase year-after-year. In fact, the inflation in college tuition is higher rate than other products and services including heatlhcare as shown in the chart below from one my earlier posts on this subject.

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The chart below shows the growth of college tuition from the 1980s:



From a weekend article in the Journal on college tuition and aid:

Financial-aid policies vary widely among schools. Last month, Stanford University in Palo Alto, Calif., said undergraduate students’ parents who have annual income below $125,000 generally won’t have to pay tuition, though the students must contribute at least $5,000 a year toward room and board and other costs. But total costs, including tuition, at some private universities can exceed $60,000 a year, and financial assistance is much less generous.

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College Tuition By Year-Best

The average annual cost of tuition, fees and room and board at private nonprofit four-year colleges and universities totaled $42,419 in 2014-15, up 3.6% over a year prior, according to data from the College Board. At public four-year colleges, that figure was $18,943 for in-state students, up 3%. Financial aid can include a mix of need-based and merit-based assistance.

Source: How to Play the College Financial-Aid Game, April 17, 2015, The Wall Street Journal

Why is the cost of college education is so high and shows no sign of decreasing any time soon?

There are a multitude of reasons for why college tuition is rising. I have listed below four of them below:

  1. The annual salary and other compensation of university presidents is very high.Some colleges pay them millions as if they are running a public corporation. So just like their CEO peers in the private industry these noble men and women try to milk as much as possible before their retirement.
  2. Just like so many other industries, plenty of paper-pushers now work in universities. These “Administrators” are also paid lavish salary and benefits and most of them do not contribute anything to education. Many schools employ more of these people than actual professors or instructors.
  3. Sports is a big business for colleges and its not uncommon to see even a third-rate university spend millions on a stadiums or other things related to sports. The money for this has to come from somewhere and one source is tuition paid by students.
  4. The Federal government hands out unlimited amounts in student loans to anyone who has a pulse and enrolls in college.Despite recent changes to the student loan program, it is still easy to get student loans. Some unemployed people even enroll in college and take student loans to use on other things like paying bills and other expenses. Colleges know that since students have access to this easy Federal money they can raise tuition and just add it to the student’s account.