History of NATO Expansion: Infographics

The North Atlantic Treaty Organization(NATO) was founded in 1949 and evolved to protect the West from the USSR. The USSR established its own organization called The Warsaw Pact to protect its allies in Europe. The Warsaw Pact collapsed when the USSR collapsed in 1989-91. Though the enemy split into countries the NATO survived and continues to evolve to combat present and future attackers.

From its original inception the NATO has added new members and today 29 countries are members of this powerful military alliance as shown in the infographics below:

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Source: Sputnik News

Defensive Sectors’ Weightage in the S&P 500 Has Declined Since The 1990s

The S&P 500 Index is not as diversified as many investors think. In fact, the IT sector alone accounts for just over 25% of the index and the weightage of the defensive sector has fallen continuously since the 1990s.

S&P 500 sector breakdown:

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Source: S&P 

The defensive sector used to account for 35% to 40% in the early 1990s. Since then it has declined to reach 16% now. In the past two the decline in weightage has accelerated sharply according to Matthew A. Young of Young Investments.

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Source: July 2018 Client Letter: Are you Prepared for the Next Stock Market Downturn?, Young Investments

The high allocation to the tech sector is big risk for investors especially during market corrections or a bear market. From the above article:

If the S&P 500 was able to fall more than 50% during the last two big bear markets when defensive stocks were a greater share of the index, what happens during the next big bear market?

The biggest sector in the S&P 500 today is technology. During the dotcom bust, the S&P 500 technology index plunged 83%, eviscerating the savings of millions of investors loaded to the gills with technology shares.

According to the most recent Bank of America Merrill Lynch Fund Managers Survey, the most crowded trade on Wall Street today is big technology stocks.

Unsuspecting index-based ETF investors may have an unpleasant surprise in store during the next market downturn. That seems to be the opinion of Jim Rogers. Rogers was the co-founder of the Quantum Fund, one of the most profitable hedge funds on record. Rogers expects the next bear market to be “horrendous”—maybe even the “worst”—and he thinks ETFs could collapse more than anything else because that’s what everybody owns. ETFs are of course supposed to trade near the underlying value of their assets, but during sharp market moves we have seen prices diverge widely from the underlying value of those assets.

The key takeaway for investors is that the S&P 500 should not be considered as well diversified. Hence products derived off of the index such as ETFs or mutual funds will perform poorly in adverse market conditions.

Related ETF:

  • SPDR S&P 500 ETF (SPY)

Disclosure: No Positions

On the Revenue Exposure of Top 10 Companies in the MSCI Europe Index

Many multi-national firms based in the developed world have substantial exposure to overseas markets than their domestic markets. In fact, some derive a big portion of their revenue and earnings in foreign countries than their home countries. For instance, BHP Billiton Ltd is a FTSE 100 firm in the UK. However the mining giant earns most of its earnings from abroad for obvious reasons that the UK is an island and does not have many natural resources. So when looking for foreign stocks it is important to understand where they are most exposed to. In the BHP example, it is more dependent on the global economy than the British economy. So investing in BHP to gain exposure to the UK market will not be a wise move.

I came across an article recently that discussed the factors to consider for diversification using the MSCI Europe as an example. From the article:

  • Globalization has changed the diversification game. For decades investors could diversify their exposure to U.S. stocks by buying baskets of companies based overseas. But new global trade patterns have turned ideas and information, not just manufactured goods, into valuable products. This shift has blurred the lines and turned companies’ physical headquarters into just a mailing address. Successful global companies often collect more revenue outside their own home country borders. For instance, a review of S&P 500 company revenues shows that about 37% is derived from outside the U.S. Meanwhile, the 10 largest companies in the MSCI Europe Index get approximately 69% of revenues from outside Europe, in part due to slower growth in their region and better opportunities abroad.

 

Source: Global investing reality check, Capital Group

The companies listed above are shown below with their ADR tickers and current dividend yields:

1.Company: Royal Dutch Shell PLC (RDS.A)
Current Dividend Yield: 5.50%
Sector: Oil, Gas & Consumable Fuels
Country: UK

2.Company: Nestle SA (NSRGY)
Current Dividend Yield: 3.10%
Sector: Food Products
Country: Switzerland

3.Company: Novartis AG (NVS)
Current Dividend Yield: 3.50%
Sector: Pharmaceuticals
Country: Switzerland

4.Company: HSBC Holdings PLC  (HSBC)
Current Dividend Yield: 5.27%

Sector: Banking

Country: UK

5.Company: Roche Holding AG (RHHBY)
Current Dividend Yield: 3.53%
Sector: Pharmaceuticals
Country: Switzerland

6.Company: BP PLC (BP)
Current Dividend Yield: 5.46%

Sector:Oil, Gas & Consumable Fuels

Country: UK

7.Company: Total SA (TOT)
Current Dividend Yield: 4.53%
Sector:Oil, Gas & Consumable Fuels
Country: France

8.Company: British American Tobacco PLC (BTI)
Current Dividend Yield: 6.03%
Sector:Tobacco
Country: UK

9.Company: Siemens AG (SIEGY)
Current Dividend Yield: 3.25%
Sector:Industrial Conglomerates
Country: Germany

10.Company: Sanofi (SNY)
Current Dividend Yield: 4.13%
Sector: Pharmaceuticals
Country: France

Note: Dividend yields noted above are as of Aug 1, 2018. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions.

Disclosure: No Positions

The above firms, except HSBC, are excellent multi-national firms with established track records. Investors looking to diversify with European companies can consider adding them in phases.

Fact of the Day: China Hi-Speed Rail Network

High Speed Rail Network in China is the largest in the world even beating developed Europe. The following fact the astonishing growth in high-speed rail transportation in China.

High-speed rail network before 2007 = 0  kilometers

High-speed rail network now = 25,000  kilometers 

Source: Seeing is believing – China’s amazing growth over 40 years, China Daily

In just 10 years the Chinese have successfully built the network from scratch spanning 25,000 kms. Curious minds are thinking how many years it will take the US to beat the Chinese in this form of transportation by building 25,000 kms or the lesser equivalent in miles.

Tax Revenues as a Percentage of GDP: Chart

Tax revenues as a percentage of GDP vary widely across countries.  The chart below from OECD shows the figures for the latest year available:

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Source: Seven surprising facts about tax revenues around the world, Schroders

Though Greece and Italy have often been criticized they generate more taxes as a percentage of GDP than most other economies. Most European countries especially France and Nordic countries have higher tax revenues than the OECD average.

The US rate is lower than the OECD average and Mexico has the lowest tax revenues as a percent of GDP among OECD member nations.