Australian Stocks Have Climbed a Wall of Worry Since 1900: Chart

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Equity markets have always overcome crises of all shapes and sizes. The long-term return of stocks as measured in decades is positive. There are always fears and crises for investors to worry about. For example, in the recent past we have the Global Financial Crisis(GFC), the Ebola virus scare, Italian debt crisis, multiple Greek sovereign debt crises, sky high crude oil prices, recessions, euro debt crises, SARS virus panic, Brexit, oil price crash, etc. The list is endless.

There is never a year where the world was quiet and peaceful and there was nothing to worry about. Despite the multitude of crises stocks have generally grown higher over the years. This phenomenon is true in the Australian equity market also. An article by Dr.Shane Oliver at AMP Capital discussed the importance of focusing on the long-term returns and ignoring short-term noises.

Australian shares have climbed a wall of worry since the 1900 and have returned an average of 11.8% per year.

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Source: Successful investing despite 115 million worries and Truth Decay – how to turn down the noise, Dr Shane Oliver, AMP Capital

Relative to Australian equity returns, US stocks have returned 9.8% per year during the same time period.

Related ETF:

  • iShares MSCI Australia Index Fund (EWA)
  • SPDR S&P 500 ETF (SPY)

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Disclosure: No Positions

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On The Valuations of Emerging Equity Markets

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Emerging market stocks have had a severe correction so far this year. With many of these markets down substantially some contrarian investors may be considering adding emerging equities at current levels. A few articles I have come across recently have suggested that these stocks are attractive from a fundamental standpoint.

In a post Russ Koesterich at Blackrock states that emerging markets may be a good bet for a potential rebound. He notes a few countries China, South Korea, Russia and Brazil are cheap based on valuation.

From the post:

Following the recent correction, EM stocks are trading at levels that preceded previous rebounds. EM equities are trading at roughly 1.55 times price-to-book (P/B), the lowest since late 2016 and a 35% discount to developed markets. Price-to-earnings (P/E) measures paint a similar picture. Current valuations represent a 33% discount to developed markets. Today, countries from Russia to South Korea are trading at less than 10x earnings (see Chart 1)

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Source: Emerging markets’ lost (near) decade, Blackrock blog

At Schroders Andrew Rymer makes the argument in favor of emerging stocks based on a few variables. From the article:

Attractive valuations

On the face of it, the valuation of emerging markets equities appears to be cheap when compared to their long-run history and relative to developed markets, as the table above highlights. The deepest shade of green indicates the best value while at the other end of the scale, the heavy red highlights expensive valuations.

The trailing price-to-earnings ratio looks at the current emerging markets index price relative to the past 12 months earnings for all of the index companies. The lower the ratio, the cheaper the market.

Emerging markets score relatively well, sitting just below their long-run average.

Price-to-book also uses the value of the emerging markets index but in this case divides by the accounting book value, or net asset value. Again, a low number implies better value. On this measure, emerging markets stocks are trading broadly in line with their long-run historical average at 1.7x.

Dividend yield, meanwhile, is the income paid to investors as a percentage of the current price. In this case, a lower dividend yield has been associated with poor future returns. Emerging markets stocks currently offer a dividend yield of 2.6%, above their long-run average of 2.4%.

Notes: 

DY – Dividend Yield

P/E – Price to Earnings ratio

P/B – Price to Book ratio

Source: Five charts that explain the case for emerging markets, Schroders

Investors hunting for bargains in the emerging market space can find plenty of bargains at today’s prices.

The Top 10 Pharmaceutical Companies 2018

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The global pharmaceutical industry is huge and was estimated to be over $1.11 Trillion in 2017. The Top 10 firms alone generated revenues of over $437.0 billion accounting for about 40% of the global market share according to a report published earlier this year by IGEA Hub. They analyzed the top 15 companies to develop and identify the top ranked 10 companies. The criteria used in the ranking is described below:

The ranking model incorporated seven criteria for each organization with focus on revenues generated by pharmaceutical products and growth in pharmaceutical revenues (2016 – 2017). The criteria includes pharmaceutical revenues, annual pharmaceutical revenue growth, total R&D expense, total expense, total income, proportion of revenue from top three pharmaceutical products and revenue per employee. A score statistic was developed based on these selected criteria. Each company was assigned a score for each criteria and a weighted sum was used to arrive at the final score statistic. Pharmaceutical revenue received the highest weight (45%) while revenue from top 3 products (5%) receives the lowest. The score statistic represented the pharmaceutical financial health and diversity of product portfolio of each company.

The following infographic shows The Top 10 Pharmaceutical Companies 2018 based on revenues in 2017:

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Source: IGEA Hub

The US market tickers of the above firms are listed below:

Europe-based: Roche Holding AG (RHHBY), Novartis AG (NVS), Sanofi (SNY), GlaxoSmithKline (GSK)

US-based: Pfizer Inc (PFE), AbbVie Inc(ABBV), Johnson & Johnson (JNJ), Merck & Co Inc (MRK), Gilead Sciences, Inc.(GILD), Amgen(AMGN)

Investors looking to add some exposure to the pharma sector can start their research beginning with these drug giants.

Disclosure: No Positions

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U.S vs. Canadian Financials: Which Is Better?

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The U.S. financial sector is similar to the Canadian financial sector in some ways but different in others. For example, the banking industry in Canada is dominated by just 5 or 6 major banks forming a nice oligopoly. However it is not the case south of the Canadian border.

From the standpoint of equity returns, is the US financial sector better than the Canadian one or the other way around?

The answer to the above question is US financials are better in the short term but Canadian financials beat their US peers in the long run.

For instance, while US financials have performed very well in the recent past – say 5 years compared to their Canadian counterparts. Let us use the iShares S&P/TSX Capped Financials Index ETF(XFN.TO) trading on the TSX as a proxy for Canadian financials and the iShares U.S. Financials ETF (IYF) for the US. The big five Canadian banks account for about 65% of the ETF while five major banks constitute only about 23% of the US ETF.

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Source: Yahoo Finance

Clearly the US financial sector has strongly outperformed the Canadian peer in the past 5 years.

However comparing returns from Jan 1, 2008 thru Sept 25, 2018 shows that Canadian financials yielded 24% more in return than their American counterparts.

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In terms of long-term returns from 2001, Canadian financials have vastly outperformed US financials as shown in the chart below. In fact, the gap between the two returns is huge.

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Source: Yahoo Finance

In the recent past, the commodity-driven economy of Canada has been adversely affected by falling commodity prices particularly oil. Hence financials under-performed. But over long periods Canadian financials have earned much higher returns over their American peers.

Note: The above comparison does not include the impact of taxes and foreign exchange rate fluctuations.

Disclosure: No Positions

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