A Comparison: US and Australian Blue Chips

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Some of the world’s top tech companies are based in the U.S. Among the blue chips a few of them were founded less than 50 years ago. Most of the Australian blue chips on the other hand, were founded in the 19th century. Only one of them was founded in the 20th century in 1924.

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Comparing US vs Australia Blue Chips

Source: Adapting to the force of disruption starts from the top down, Finfeed, May 3, 2016

NOTE: Amazon(AMZN) was actually founded in 1994 and not in 2004 as shown in the graphic above.

Like Canada, Australia is also a commodity-based economy. Hence much of the lucky country’s wealth simply comes from digging stuff up from under the ground and selling it to others especially China. Hence things like world-class innovation, risk taking and a robust startup culture similar to the one in Silicon Valley is practically non-existent.

Disclosure: No Positions

The World’s Happiest Countries Ranking 2016

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The world’s top happiest country is Denmark according to the UN’s World Happiness Report 2016 Update. The other countries in the top five list are Switzerland, Iceland, Norway and Finland in that order. Canada is the 6th most happiest country. The U.S. ranks 13th just above Costa Rica.

It is not surprising that the Scandinavian countries top the ranking as they usually come on the top of such lists.

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Worlds Top happy countries 2016

Source: World Happiness Report, UN

Incidentally fellow blogger Barry posted the following chart on government spending on social assistance in OECD countries. Most of the Scandinavian countries appear on the top of this chart.

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Government Spending on Social Programs

Source: Fivethirtyeight 

Hat Tip: The big Picture

The relationship between high government spending on social programs and happiness is worth a deeper study.

China’s Roller Coaster Stock Market Returns

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The Chinese equity market is characterized by booms and busts. Since 1996, the upward and downward movements in the market has been violent. For example, during the Global Financial Crisis of 2008-09 the MSCI China Index lost 65% of its value. From 2004 thru the peak in 2008, the index soared by an astonishing 757%.

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MSCI China Returns

Source: We Still Don’t See a China Hard Landing, Mark Mobius, Franklin Templeton Investments, May 9, 2016

A few facts on the China stock market from the above Mobius article:

China’s A-share market is large, with more than 2,000 companies listed on the Shanghai Stock Exchange and about 1,000 listed on the Shenzhen and other stock exchanges in China. Quoted in local currency, only residents of the People’s Republic of China (PRC) or those under the Qualified Foreign Institutional Investor (QFII) and Renminbi Qualified Foreign Institutional Investor (RQFII) schemes can trade A-shares, which are considered the “domestic” market. The main characteristic of the domestic market is that it’s dominated by retail investors, so there are often big swings that tend to be tied to short-term investor sentiment rather than longer-term fundamentals. Index provider MSCI has been considering the inclusion of the Shanghai domestic market in its benchmark indexes, and it has even been talking about including 5% of China A-shares’ free float-adjusted market capitalization in the MSCI Emerging Markets Index. MSCI is expected to announce its decision in June 2016, and if A-shares are included, we would anticipate increased foreign investor interest in China’s domestic market.

The MSCI China Index captures large- and mid-cap representation across China H-shares (securities of Chinese companies traded in Hong Kong and quoted in Hong Kong dollars), B-shares (securities of Chinese companies that trade on either the Shanghai or Shenzhen stock exchanges and quoted in US or Hong Kong dollars), Red chips (companies outside the PRC traded in Hong Kong, but owned directly or indirectly by mainland Chinese state-entities) and P chips (companies outside the PRC traded in Hong Kong and owned by individuals in mainland China).

Here are a few points to remember before investing in China:

  • Just like other emerging markets Chinese equities will always be volatile.
  • As China follows a cross between democracy and communism, it will always be more unpredictable in terms of market interventions by the state, As a result, extreme booms followed by busts are to be expected.
  • As retail investor participation is high in the domestic market, any sign of volatility or bear market leads to panicked investors running for the exit. On the other hand, soaring stocks lead more mom-and-pop investors bid up share prices to the stratosphere.
  • While much of the growth in the past came from infrastructure investments, currently the state is trying to change the economy to a consumption-based economy. This process will take many years and there is no guarantee of success. As a result, infrastructure-based firms are not going to see their stocks sky-rocket any time soon.

Canada: Households’ Savings Rate and Indebtedness Ratio

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The Canadian Household Savings Ratio stood at 8.1% in Q4, 2015 according to a new report by the OECD. Currently the US personal savings rate stands at 5.4%. The savings rate in Canada tend to be traditionally higher than in the U.S.

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Canada-Household Savings Ratio

However Canadian household’s debt is also growing at an alarming rate. Much of the debt is due to taking on huge mortgages to buy houses. Since house prices are artificially inflated to bubble levels, it is not uncommon for people to pay a million C$ with a mortgage for a run-down shack-like houses in places like Vancouver.

An excerpt from the OECD report:

The households’ indebtedness ratio (i.e. the total outstanding debt of households as a percentage of their disposable income) is a measure of (changes in) financial vulnerabilities of the household sector  and its evolution over time allows for an assessment of households’ debt sustainability. In Q4 2015, household indebtedness in Canada (Chart 6) increased to 166.2% of disposable income, its highest level since 1990. As mortgage debt makes up the largest component of household debt in Canada, Chart 6 shows that Canadian households have continued to increase their borrowings to finance house purchases, in the face of low interest rates and high house prices.

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Canada-Household Indebtness

Source:A dash of data: Spotlight on Canadian Households, OECD Insights, May 10, 2016

The Leverage Ratio of Canadian Banks Has Declined

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The leverage ratio measures the ability of a bank to absorb losses. This ratio is important because soundness of a bank is put to test during a financial crisis and strong banks usually tend to weather storms than weak banks. During the 2008-09 crisis, many small banks in the US failed due to this factor.

From an article published in the Financial Post on the state of Canadian banks:

Canada’s banks, touted as the world’s soundest for eight straight years by the World Economic Forum, have become laggards to global peers on a key gauge of their ability to absorb losses.

The leverage ratio, a standard introduced globally by the Basel Committee on Banking Supervision after the 2008 financial crisis, measures Tier 1 capital as a per centage of total assets. After once boasting world-beating capital levels that helped them weather the crisis and even expand as some global competitors retrenched, Canadian banks’ advantage has dissipated under the new rules.

The country’s six biggest banks’ leverage ratio averaged 3.9 per cent at the end of January, trailing the 4.6 per cent average of Europe’s 15 largest lenders and 6.6 per cent average for the top six U.S. banks as of Dec. 31, according to calculations based on company filings. The higher the lenders’ ratio, the more capital it has available to absorb losses. A year earlier, the U.S. advantage was narrower and European banks were basically on par with the Canada.

“This is the weak spot for the Canadian banks,” said Doriana Gamboa, senior director of financial institutions at Fitch Ratings Ltd. in New York, adding that banks outside Canada have been gaining in capital strength. “Globally, there is a big push by regulators in terms of capital and having banks hold more.”

Source: Once touted as world’s soundest, Canadian banks are falling behind global peers on a key strength gauge, Financial Post, May 10, 2016

Despite the lower leverage ratio, Canadian bank stocks are good to hold for long-term investment. They tend to offer stable and growing dividends with some price appreciation year after year like clockwork compared to other developed world banks particularly in the US.

The five major Canadian banks trading on the US markets are listed below with their current dividend yields:

1.Company: Bank of Nova Scotia (BNS)
Current Dividend Yield: 4.65%
Sector: Banking

2.Company: Bank of Montreal (BMO)
Current Dividend Yield: 4.31%
Sector: Banking

3.Company: Canadian Imperial Bank of Commerce (CM)
Current Dividend Yield: 4.68%
Sector: Banking

4.Company: Royal Bank of Canada (RY)
Current Dividend Yield: 4.36%
Sector: Banking

5.Company: Toronto-Dominion Bank (TD)
Current Dividend Yield: 3.94%
Sector: Banking

Note: Dividend yields noted above are as of May 10, 2016. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions.

Disclosure; Long all five banks