The U.S. Pharmaceutical Industry Map

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Here is a chart that shows the various players in the pharmaceutical industry in the U.S.:

Click to enlarge

US-Pharma-Industry-Map

One of the fast-growing sectors within the healthcare industry is the pharmacy benefit management(PBM) business. The companies in this space provide administration services to control drug cots to patients and other clients. Express Scripts Holding Company(ESRX) is of the top firms in the PBM sector.

Another type of player operating in this industry is the pharma distributors. These companies are the wholesalers of drugs. They buy drugs in bulk from manufacturers and supply hospitals and pharmacies after jacking up the prices by several percentage points for acting as the middle men. These companies do not contribute anything productive other than to buy in bulk and sell after a markup. These companies are analogous to auto dealers. One does not need to be a genius to figure out that auto dealers do not contribute nothing to the society other than to make high profits from unsuspecting car buyers. Some of the major firms in this sector include  AmerisourceBergen Corporation (ABC), Cardinal Health (CAH) and McKesson Corporation (MCK).

Other players in the industry include the insurers, pharmacy companies, hospital companies and so forth. One of the reasons for the atrocious prices of drugs can be attributed to so many players involved in the pharmaceutical industry.

Source: Angles and Perspectives, Q2, 2013,  the Quarterly Newsletter of PSG Asset Management

What is the Impact of Inflation on Equity Returns ?

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Major U.S. markets reached all-time highs last week. For example, the S&P 500 reached a record high of 1,687.18 surpassing the earlier high attained in 2007 before the global financial crisis.

Multi-year return of S&P 500:

SP500-Long-Term-Return

Source: Yahoo Finance

All the cheer and excitement that followed for reaching the milestones may be premature. This is because on an inflation-adjusted basis equities are still a long way from reaching new records.

According to a report by T.Rowe Price, at the end of first quarter the S&P 500 index stood 30% below the inflation-adjusted peak reached during the dot-com mania in 1999 (not including dividends).

 Click to enlarge

SP500-inflation-adjusted-price

Source:  Real Returns Can Preserve Purchasing Power, T.Rowe Price

The same report noted that while in the short-term stocks did not yield an inflation-beating returns, in the long run such as 20-year or 30-year periods stocks beat inflation.

From the report:

The table below shows the percentage of rolling investment periods in which various assets beat inflation from 1950 through 2012. Over shorter investment horizons of one, five, or even 10 years, stocks failed to outpace inflation in more than 20% of the periods, but bonds and cash also had spotty records.

Percentage of rolling periods in which stocks, bonds, cash and selected portfolio strategies Outpace Inflation: December 31, 1949-December 31, 2012

Finacial-Asset-Classes-Beating-Inflation-Return

Over 20- or 30-year periods, however, stocks beat inflation in every one, while bonds had positive real (inflation-adjusted) returns 92% of the time. This means that bond returns lagged inflation in 32 of the 397 rolling 30-year periods (calculated monthly), most of these occurring in the 30-year periods ending in the mid-1960s through the early to mid-1980s.

Also, the magnitude of the outperformance for stocks was significant. Over the entire 63-year period, large-cap stocks had an average annual real rate of return of 7.0% compared with about 2.6% for bonds and 0.8% for cash (30-day Treasury bills). Stocks also outperformed bonds on a real return basis in virtually all of the 20- and 30-year periods, usually by a wide margin. Of course, stocks are generally more risky than bonds, but the volatility of stocks is significantly reduced over longer-term periods.

It should noted that the actual return than an investor receives will be even lower than the inflation-adjusted returns since taxes, trading commissions, expenses and fees for ETF and mutual fund investments have to be taken into account when calculating the actual return on an investment. But dividends from income-generating assets may help offset some of these expenses. In summary, stocks are the best financial  asset classes  to own for generating  an inflation-beating return over the long-term.

Related ETF:

  • SPDR S&P 500 ETF (SPY)
  • Vanguard Dividend Appreciation ETF (VIG)
  • SPDR S&P Dividend ETF (SDY)
  • iShares Dow Jones U.S. Select Dividend ETF (DVY)
  • PowerShares Dividend Achievers ETF (PFM)

Disclosure: No Positions

Why Indians Ignore The Stock Market While Foreigners Invest

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The equity market in India as represented by the benchmark Sensex is up 1.40% YTD. In the past year, the index has had a strong run going from over 16,000 to 20,443 this year before closing at 19,704 last Friday. The Sensex has more than doubled from the lows reached in early 2009 at the height of the global financial crisis as shown in the chart below:

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Sensex-5-Year-Return

Source: Yahoo Finance

Despite the solid performance the equity market, most Indians seem to avoid the stock market and instead invest in other assets. For example, the number of retail mutual fund accounts has declined by 4.25 million in the first 11 months of the fiscal year 2012-13 according to one report. This does not mean 4.25 million individual investors since one investor can hold multiple accounts.

Much of the rally in Indian stocks especially this year can be attributed to foreign investors who have pumped billions into the market while domestic investors have been mostly pulling their investments in stocks. Unlike other emerging countries such as Brazil where foreign investors have reduced their exposure in the past few years, India has become a hot destination for foreign investors.

From a story in the Journal earlier this month:

From January to March, foreign institutional investors’ ownership of India’s top 500 stocks rose at the fastest quarterly pace ever, according to Citigroup C -0.02% . Collectively, their stake of 21.1% hit an all-time high, and investors outside the country now own more of India Inc. than those within. Ultralow interest rates in the West helped push foreign inflows to $10 billion in the period, the second highest in any quarter.

Yet Mumbai’s stock market fell 3%. Even as foreigners were buying, the locals were selling: Domestic institutions like mutual funds sold off $6 billion. India’s low growth and high inflation have drained their enthusiasm for stocks.

It is interesting to analyze why foreign investors rushing into Indian equities while domestic investors are ignoring them.

Here are five reasons why domestic investors tend to avoid stocks:

1. Banks pay high interest rates for many types of accounts making them more attractive to high-risk assets such as stocks. For example, one can easily find banks offering 9.00% interest on a 1-year CD. Hence most people don’t bother with investing in stocks since they have not yielded astonishing annual returns since the financial crisis of 2009.

2. Traditionally Indians are highly conservative and this is reflected in the low stock market participation rate. India has one of the lowest stock market participation rate in the world at less than 3.50% according to one study. For a country with a population of over 1.2 billion this is indeed very low. Despite the tremendous growth of Indian equity markets in the past decade, the general population still considers equity investments to be highly risky.

3. Indians consider gold as “safe” investment compared to stocks. Hence India remains the largest importer of gold in the world.  The demand for gold rose from 679 tonnes in 2008 to 975 tonnes in 2011 despite higher gold prices before the crash in gold prices. Demand has picked up again as lower prices attract buyers. Though gold does not provide an income like stocks do with dividends, the demand for gold continues to be high since they are regarded as a store of wealth, used as jewelry , offered in weddings, etc.

4. The real estate sector is growing rapidly and prices seem to head for the stratosphere year after year. Unlike some other countries, real estate prices did not plummet due to the financial crisis and in fact continues to remain strong. As a result, more domestic investors are attracted to the real estate market than the equity market. In addition, most companies have low dividend payouts making their stocks unattractive to income investors whereas an investment in real estate can generate a better yield.

5. Saving for retirement by investing in stocks is not widely popular phenomenon. Most workers save for retirement in a fund known as Employee Provident Fund (EPF) that pays an interest of of 8.70% and is regulated by the state. Hence most of the retirement savings do not flow into the equity market. This is in sharp contrast to other countries such as the U.S. where most workers save for retirement by investing in stocks and bonds.

Related ETFs:

WisdomTree India Earnings (EPI)
iShares S&P India Nifty 50 Index (INDY)
PowerShares India (PIN)

Disclosure: No Positions

The Top Trade Partners of Germany 2012

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The German economy is the largest in Europe with a GDP size of about 2.6 Trillion Euros in 2012. As an export-driven economy, Germany consistently runs an export surplus.

The following chart shows Germany’s major trading partners in 2012:

Click to enlarge

Germany-Trading-Partners-2012

Source: De Statis

Some interesting facts about Germany’s trade:

  1. Germany’s most important trade partners are other European countries. For example, the major source of imports last year was The Netherlands and the destination for exports was France. 
  2. About 69% of “Made in Germany” goods were exported to European countries.
  3. The 2nd most important market for German exports were Asia followed by the Americas.
  4. Asia accounted for only 18% of German imports.
  5. After France, the top destination for German exports was the U.S. and UK.
  6. In terms of imports, the country’s major import partners were The Netherlands followed by China and France.
  7. While the U.S. is a major export and import market for Germany, Canada does not appear in the top 10 trading partners list.

Related ETFs:

  • Market Vectors Germany Small-Cap ETF (GERJ)
  • iShares MSCI Germany Index Fund (EWG)
  • iShares MSCI Germany Small Cap Fund (EWGS)

Disclosure: No Positions