Italian Real GDP Growth Since 1999

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Italy used to be called “The Sick Man of Europe”. More recently a few years ago during the European Sovereign Debt Crisis Italy was part of the PIIGS countries which represented Portugal, Ireland, Italy , Greece and Spain. Over the long term also, Real Italian GDP Growth has been the slowest among the developed world as shown in the chart below. Sine early February, former ECB President Mario Draghi has become the Prime Minister of Italy. It would be interesting to see if Mr.Draghi can help the country finally get out of the long doldrums.

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Source: Can Mario Draghi Recharge Italy’s Economy?, Alliance Bernstein Blog

The Top 50 Non-Financial State-Owned Enterprises

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Some of the large companies in the world have partial or major state ownership. Unlike fully publicly-owned firms, these State-Owned Enterprises(SOEs) are subject to high involvement and control of politicians or government bureaucrats. As a result, investors in these SOEs have to keep track of political or policy changes and their impacts on these enterprises. For example, recently Brazilian President Jair Bolsonaro fired the market-friendly CEO of Petroleo Brasileiro S.A. (PBR) Roberto Castello Branco and replaced him with his ally the former Defense Minister Joaquim Silva e Luna due to a fuel price increase fight with Castello. As expected Petrobras stock fell heavily after this announcement.

So what are the Top 50 State-Owned Enterprises(SOEs)? The following chart provides the answer:

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Source: Analysis: After Brazil ructions, a rethink for investors in emerging market state firms, Reuters

From the above piece:

Utilities and power companies can be subject to politically motivated pricing directives, while financial disclosures and productivity can lag the private sector.

Profitability can take a backseat to political priorities such as creating employment or winning elections.

“First and foremost, investors need to figure out and understand where does this SOE fit into the agenda of the political and socio-and economic landscape of the country… its social importance as employer or as a contributor to the budget,” Sergey Dergachev, a fund manager at Union Investment, said.

China has ownership interests in some of the big companies such as China National Petroleum, China Petrochemical, etc. In the developed/western world, the following firms have some form of state ownership:

  • Volkswagen AG (VLKAY) – Germany
  • Gazprom(OGZPY) and Rosneft Oil Company (OJSCY) – Russia
  • Electricite de France SA (ECIFY) and Engie SA  (ENGIY) – France
  • Equinor ASA (EQNR) – Norway
  • Airbus SE (EADSY) – France, Germany and Spain

The key takeaway for investors is that state-ownership is a double edged sword. While it can provide stability, investors can be sidelined by the state which may use the enterprises for other purposes such as political gains in an election.

Disclosure: Long PBR

On The Evolution Of The S&P 500 Since Inception

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The S&P 500 index closed at 3,841.94 yesterday and is up 2.29% year-to-date on price return basis. The 5-year and 10-year annualized returns are 13.95% and 11.27% respectively. This growth rate is indeed excellent when compared to foreign equity markets. The US market as represented by the S&P 500 has performed very well not just in the past few years but also in the long run. Since inception in 1957, the index has grown steadily despite many bear markets and many crises. The below chart shows this great run.

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Source: Celebrating 64 Years of the S&P 500 by Hamish Preston, S&P Indexology Blog

An excerpt from the above article:

The S&P 500® was launched on March 4, 1957, and so yesterday marked its 64th birthday. To celebrate this milestone, a number of my colleagues and I recently appeared on our Index Investment Strategy team’s weekly call (sign up for the daily dashboard to receive the invite). If you couldn’t make it, here are a few highlights.

Exhibit 1 shows the S&P 500’s closing price levels over its live history. Eleven bear markets captured periods of pessimism, while the intervening recoveries reflected improved outlooks. Overall, the index posted an annualized price return of around 7.2% over the last 64 years.

The benchmark index has evolved over the years and has captured the top sector trends as well. The following chart shows the top five companies in the index in each decade since 1970. Many of the the market leaders of the 2000s have crashed and have become so-so run companies now. Lumbering oil giant Exxon Mobil(XOM) got kicked out of the index.  General Electric(GE), Cisco(CSCO) and Citigroup(C) are like dead-man walking on life-support for many years now. From the article:

Representing the Large-Cap U.S. Equity Market

The S&P 500 represents the large-cap segment of the U.S. equity market. The index is float-market-cap weighted, which means that index weights reflect aggregate investor expectations. Exhibit 2 shows how the evolution of the largest five companies in the S&P 500 and its GICS® sector weights captured the increased importance of Information Technology companies, and the reduction in Industrials and Energy companies.

 

The key takeaway is the stocks go up in the long-term and sectors and leaders change over the years as technology and consumer tastes change. So the trick is not to fall in love with one sector or a company forever. An easy option to avoid the pitfalls of failing to keep up with changes is to simply buy a passive fund like an ETF that replicates the performance of the S&P 500.

Related ETF:

  • SPDR S&P 500 ETF (SPY)

Disclosure: No Positions

A World Less Free: Infographic

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Democracy is declining in many countries of the world according to a new report by Freedom House. The authors of report note that global freedom is on the decline for the 15th consecutive year.

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Source: RFE/RL Infographic

The chart above shows most of the world is either is not free or partly free.

Over the past decade the US also has experienced a decline in democracy score of 11 points. Some of the reasons for this decline are listed in the graphic below.

 

 

Source: Freedom in the World 2021, Democracy under Siege, Freedom House

 

 

On the Long Term Return of the UK Stock Market

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The UK equity market is one of the best markets for income-seeking and long-term investors. In the universe of international stocks, UK stocks are traditionally known for their high dividend yields. In addition, like other developed markets, British stocks also perform well in the long run measured in years or decades. The following chart shows the long-term total return from 1985 to 2020 for FTSE All Share Index. This index consists of the FTSE 100, 250 and the Small Cap Index for a total of about 600 of the largest companies in the UK market.

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Source: ”The Folklore of the Market” – investing lessons from the 1950s, Hargreaves Lansdown

From the above article:

In the long run (1985-2020) the UK stock market has given investors a total return of a little under 9% a year. Sometimes you might invest in a company or fund that does better than that. Sometimes it will do worse. 9% a year isn’t bad going though, even if future returns might be less generous. Remember that nothing is guaranteed and you could get back less than you invest.

The FTSE All Share Index had a dividend yield of 3.57% as of Dec 31, 2020. The FTSE 100’s dividend yield was even better at 3.77%.  This rate is about double that of the yield for the S&P 500. The dividend yield of the S&P 500 is usually under 2%.  The high yield on the FTSE 100 can lead to astonishing returns over the run. The chart below shows the wide gap in returns between the FTSE 100 Price Return and Total Return from 1986 thru early 2020.

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Source: This is Money

The key takeaways are: investing for the long-term can produce excellent returns and high dividends can earn a better total returns than just price returns.

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