GDP: China vs. India

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China and India rank the first and second in terms of population.Each country is home to more than one billion people. While India is a democratic country with a multitude of political parties China is a communist country with only the communist party allowed to exist.

The economic system in China is unique and is called as “Market Socialism” which is a mixture of capitalism and socialism. While China allows private enterprises the state plays a major role in the regulation of the market.

India and China have two of the largest and fastest growing markets among the emerging countries. However China is ahead of India economically and India is playing catch up. Frederic Neuman of HSBC wrote in an article in FT beyondbrics that India has done well so far but has more work to do. From the article:

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India vs China GDP

Chart 1 (above) makes an easy comparison. It shows the size of the Chinese and Indian economies in trillions of US dollars (the former is over four times as large as the latter). But here’s the twist: we date the respective lines from when officials adopted reforms in earnest (China in the early 1980s, India only in the early 1990s). Note two things. First, India is actually a little ahead of China at the same stage of the development process. Two, in truth, this counts for little because the main “growth spurt” only came thereafter. In other words: India will need to pick up speed in the coming years, ideally raising growth to double digits. Challenging stuff.

Source: Guest post: can India repeat China’s ascent?,  Jan 19, 2015, FT beyondbrics

From a related article in Fidelity UK:

Perhaps one of the most exciting things about India right now is the ambition of the government. It’s thinking big, in terms of infrastructure development and all manner of business reforms.

Take plans to fast-track the regeneration of the country’s vast inland waterways network. The rejuvenation could create vast numbers of jobs, bring trade to poorly linked towns and raise the competitiveness of companies. This is appealing in a country renowned for its overloaded road and rail networks. New inland routes for cargo ships have been mooted as well as new ports and floating hotels1.

The pro-business government’s problem, of course, is age-old and that’s its ability to press reforms and infrastructure programmes through a democratic parliamentary system. It’s a difficulty shared with Japan but not so much China.

Source: How fast can India grow? by Graham Smith, Fidelity UK

Dividend Contribution to Total Returns: A Look at Three Regions

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Dividend returns account for a significant part of total returns especially over the long-term in many markets. So it is important to hold dividend-paying stocks in the portfolio. Even a small dividend yield can amplify returns die to the effect of compounding.

How much do dividends contribute to performance? In this post lets take a look at three global regions.

1) Europe:

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Dividend COntribution-Europe

Dividends have consistently produced a positive return to European stocks since 1970 as shown above. They accounted for 39% of the total returns for the entire period shown in the chart. This is indeed substantial . During periods of stock price declines dividends have helped investors offset the losses. As European companies generally tend to have high payouts, Europe offers a fertile hunting ground for investors looking for income stocks.

2)North America:

Dividend COntribution-North America

In North America also one-third of the returns came from dividends. Though the payout ratio in the U.S. is lower than in Europe, one advantage is that companies have room to raise the payouts should they decide. As large-cap U.S. firms are flush with cash this should not be an issue.

3) Asia excluding Japan:

Dividend COntribution-Asia

Dividends accounted for more than one-third of the total returns in Asia as represented by the MSCI AC Asia ex Japan Index. The definition of this index from MSCI:

The MSCI AC (All Country) Asia ex Japan Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of Asia, excluding Japan. The MSCI AC Asia ex Japan Index consists of the following 10 developed and emerging market country indexes: China, Hong Kong, India, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan, and Thailand.

Source: Dividends instead of low interest rates, March 2015, Allianz Global Investors

Related ETFs:

  • iShares Dow Jones Select Dividend ETF (DVY)
  • SPDR S&P Dividend ETF (SDY)
  • Vanguard Dividend Appreciation ETF (VIG)

Disclosure: No Positions

How to Profit from the Strong Growth of the U.S. Auto Industry

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The automobile industry is the second largest and most important to the U.S. economy after the real estate industry. During the global financial crisis auto sales declined with the recession. Since then the industry has picked up steam and continues to show strong growth year after after. The following chart shows the annual growth of auto sales in the country since 1980:

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US Auto Sales

Source:  Truck Sales Plow Through February, Mar 3, 2015, WSJ

Based on the latest estimates, total sales this year may exceed 16 million vehicles. For a country with a population of about 318 million, 16 million a year is still a big number by any measure. Some of the reasons for investing in the auto sector include:

  • The auto industry employs millions of workers directly and indirectly and will get bailed out by the state in case of financial troubles. The bailout of GM dubbed as “Government Motors” for a while is an example.
  • Public transportation system is non-existent for the most part in all of the country other than the big metros like New York, LA, Chicago, Boston, etc. Hence cars are the only means of transportation for people.
  • So the gas pump can be considered as the umbilical cord of most Americans since without a car and the fuel to make it run survival becomes almost impossible.

Gas-Pump

  • Americans love their cars. So it is not unusual to find families spend more on cars per month than on food or other things.
  • The infrastructure of the country’s whole transportation system is mainly based on autos. For example, sub-urban living and the mall culture cannot exist without autos.

How to profit from growth of auto industry in the U.S.?

The best way to profit from the popularity and dominance of the auto industry is NOT to invest in auto makers but to invest in companies that support the auto industry. Auto makers are saddled with many issues like high wages, legacy costs like pensions, healthcare, etc. So investing in their stocks is not a good idea. Even though it is a oligopoly industry any player could still go bankrupt due to the mentioned issues wiping out equity investors.

Companies provide the nuts and bolts to the auto industry are good options for investments. For example, auto parts makers have a solid business model since they not only supply parts to auto makers for the production of new cars but also sell after-market parts to consumers directly. These firms may include tire makers, auto parts makers, car seat makers, oil companies, etc. Some of the domestic and foreign firms that support the automobile industry are listed below for consideration:

  1. Autoliv Inc (ALV)
  2. Continental AG (CTTAY)
  3. Compagnie Generale DES Etablissements Michelin SCA (MGDDY)
  4. Magna International Inc(MGA)
  5. Denso (DNZOY)
  6. AutoZone, Inc. (AZO)
  7. Nokian Renkaat Oyj (NKRKY)
  8. Johnson Controls Inc. (JCI)
  9. Bridgestone Corp. (BRDCY)
  10. Lear Corp. (LEA)

Disclosure: Long DNZOY, CTTAY

Update:

Looking for the latest auto sales data or wondering which cars are the top sellers in the U.S.? Checkout The Wall Street Journal’s cool Auto Sales page.

Why Defensive Stocks are Great to Hold for all Market Conditions

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The performance of Cyclical stocks is directly related to the state of the economy.So if the economy is in contraction mode cyclicals do not perform well. But if the economy growing then they also grow. Cyclicals include the Industrial, Consumer Discretionary, Information Technology and Materials sectors. For example, during recessions restaurant companies will suffer as consumers cut back on their discretionary spending such as eating out, going to the movies, taking vacations, etc.

Defensive stocks, as the name suggests, are great for all economic and market conditions. These stocks perform well not only during adverse economic conditions  but also during periods of economic expansions. This is because even in a recession people have to spend money on life’s necessities such as food, water, electricity, soap, etc. Unlike the cyclicals defensive stocks offer stable growth during recessions and expansions though they do not very high growth during expansions. Either way defensive stocks are a must in an investors’ portfolio as they provide stable and growing dividends and decent price appreciation over the long-term. Defensive sectors include the Consumer Staples, Utilities, Health Care and Telecom.

I came across an interesting article by authors at Societe Generale that clearly explained the concept of cyclical and defensive stocks’ performance using a simple example. From the article:

The graph below provides a concrete example on how Cyclical and Defensive stocks behave. We have chosen the automobile (Cyclical) and beverages (Defensive) sectors in the US and compared their performance. We have also highlighted the main recession periods.

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US Auto Industry vs Beverages Performance

We obviously notice at a first sight the higher amplitudes of the automobile sector against the beverages, but the most important thing that this chart illustrates, is the behavior of these sectors in a period of contraction. As we can see in the 2008 crisis for example, the decline in prices in the performance of the automobile sector is way larger than beverages. This means that the investor  holding an automobile stock like Ford would have suffer larger losses.

Source: Cyclical vs. Defensive Stocks, Societe Generale

Even though European and the U.S. economies are in recovery it is still a wise strategy to allocate some portion of a portfolio to defensive stocks. Should the current recovery stall for some reason these stocks will offer a “cushion” effect to a portfolio that declines due to adverse market conditions.

Some of the foreign defensive stocks are listed below for investors to consider for further research:

Consumer Staples

  1. Unilever NV (UN)
  2. Unilever PLC (UL)
  3. Nestle SA (NSRGY)
  4. Danone SA (DANOY)

Healthcare

  1. GlaxoSmithKline (GSK)
  2. AstraZeneca PLC (AZN)
  3. Novartis AG (NVS)
  4. Novartis AG (NVS)
  5. Roche Holding AG (RHHBY)
  6. Fresenius Medical Care AG & Co (FMS)

Utilities

  1. Edp Energias De Portugal SA (EDPFY)
  2. National Grid PLC (NGG)
  3. Electricite de France SA (ECIFY)
  4. Empresa Nacional de Electricidad SA (EOC)
  5. Iberdrola SA (IBDRY)
  6. Gas Natural SDG SA(GASNY)

Telecom

  1. Philippine Long Distance Telephone Co (PHI)
  2. Telenor ASA (TELNY)
  3. Vodafone Group PLC (VOD)
  4. Telefonica SA (TEF)
  5. BCE Inc. (BCE)
  6. Telstra Corp Ltd (TLSYY)
  7. Orange (ORAN)

Disclosure: No Positions

Washington DC, USA

Washington DC, USA