First plunge with Investment trusts

Ryan_Futuristics

Daniel54 wrote: »

I don't use CAPE,but am firmly of the opinion that Asia ( not just China) is going to be the area for economic growth over the next decade or so.

It is also an area particularly ill suited to index tracking and I would always look to invest in a managed fund for informed exposure to the region

Oh absolutely - favourable demographics and rapid infrastructure and political development

And as they say, the term "emerging economies" is rapidly shifting to "diverging economies", as many of these regions start to pull apart - cap-weighted indexes aren't the way I'd choose to invest

But then there is this Growth Paradox I sometimes mention here
http://www.forbes.com/sites/jamescahn/2014/04/07/paradox-of-growth/

The best growth regions haven't traditionally produced the best returns

And to me this demonstrates how efficiently markets price in anticipated growth ... It's the desire for certainty that pushes up what we're willing to pay (and it tends to swing a little too far each way)

bowlhead99

Daniel54 wrote: »

I don't use CAPE,but am firmly of the opinion that Asia ( not just China) is going to be the area for economic growth over the next decade or so.

Ryan_Futuristics wrote: »

Oh absolutely - favourable demographics and rapid infrastructure and political development


But then there is this Growth Paradox I sometimes mention here
http://www.forbes.com/sites/jamescahn/2014/04/07/paradox-of-growth/

The best growth regions haven't traditionally produced the best returns

Yes, you've mentioned the 'growth paradox' elsewhere, and further up this thread. Perhaps you misunderstand it though. To quote directly from the Forbes article (my highlighting):

"What the professors did find was that the correlation between equity returns and aggregate GDP growth was positive". So that's kind of exactly the opposite of what you said: "The best growth regions haven't traditionally produced the best returns"...

You mentioned upthread:

Ryan_Futuristics wrote: »

There's also the "growth paradox" - that the lowest growth regions have traditionally given better returns than the highest ... Which is why CAPE models predict better returns from Russia than the US - and I suppose in principle why there's always been an inverse relationship between risk and return

The researchers mentioned by Forbes are not saying that lower historic total GDP growth looking back over the last few years should give a better stock market performance looking forward. All they are saying is that the growth in GDP per capita does not drive the stock markets. Which is obvious - particularly in emerging markets with booming populations - because the total size of the market for goods and services and stocks is not simply dictated by how much cash each 'capita' has to spend, but how many 'capitas' there actually are.

So, an Asian or African country with modest GDP growth per capita and high population growth, might give you better returns than a developed economy which had slightly better GDP growth per head but fewer people making it happen.

It is quite a leap to go from that observation to then say that a low growth region like Russia should give a better market return than USA because it has lower growth and therefore it will be mispriced because people don't realise that lower growth generally gives a better return in the markets over multiple decades. The article isn't saying that lower growth gives a better return at all. It simply says that an economy with low growth per head can deliver better returns than one with a higher growth per head. It is not designed to be a predictor of markets, it is just observing what happened to different types of economies over the last century.

As a side note, in the quote from upthread you said: "...the lowest growth regions have traditionally given better returns than the highest ... Which is why CAPE models predict better returns from Russia than the US." That sounds nonsense to me - you are just picking two theories and jamming them together.

CAPE models do not say Russia will perform well because it has experienced poor growth for a few years and is only projected to experience 1.5% going forward. CAPE doesn't consider the future growth prospects bandied about by the IMF and others, nor the historic GDP growth rate. Because all it considers is growth or decline or stability of earnings, and share prices.

As we know, GDPs do not move together with earnings and share prices in real time. So CAPE is not really looking at GDP growth at all, it merely picks up some indirect effects of GDP growth when the growth filters through to be observed in price changes or earnings changes. There can be a multi year time lag between GDP growth creating a change in corporate earnings, and the associated price movement can be out of sync with that change in corporate earnings because sometimes the direction of earnings will have been projected in advance (based on corporate reports, fundamental analysis, macro economic conditions) while other times the prices only move after the earnings have happened.

So, CAPE does not say, as you seemed to infer by jamming the two theories together: invest in Russia because Russia is low growth and this will produce better share price increases. It simply observes that people are paying more for the earnings in the US and therefore if earnings around the world were valued equally based on what people have historically paid for earnings, perhaps the price of the US stocks would go down and the price of Russian ones would go up.

You shouldn't consider that on it's own and decide that price in US is somehow wrong or the price in Russia is cheap. You have to consider why people will pay a different price in one country vs another at this point in time. It is all about perceived prospects. If we expect Russia to only grow by 1.5% annualised over next 5 years (per the IMF), and it has a lot of political risks and a lack of stability, while the USA has a solid growth projection and more stability, then it is perfectly reasonable to pay more for high growth USA companies.

Market timing is about exploiting weaknesses in data. So if you think that Russia is to cheap now because its low growth will only be temporary and its trade arguments and military problems are only temporary, and the low prices available on global markets for its mineral and energy resources are only temporary, then of course you can invest with a 50 year view.

At some point it will not have trade arguments or military problems and the world will be more willing to pay for its natural resources etc and we should see higher valuations if you leave it long enough. Whether that's 1 year or 5 or 10 away is unclear but it is certainly worth trying to catch some of the price 'correction' if you have long enough to wait. You will be able to look back and say maybe you caught the bottom.

You don't really need a CAPE theory or a Forbes article to tell you that if the market has overshot when driving down the valuations of companies in X country but the fundamentals are OK, and you pounce on it, you can make money. The skill is to be able to say whether the market has actually overshot, or whether the price is about right for the risks faced in tying up your money while you wait for a recovery, when you could instead be investing somewhere with more immediately decent prospects at a company performance level.

If you recognise you can't control valuation (because markets can sit at the 'wrong' PE or CAPE for a long time) then you have to keep an eye on the fundamentals of the companies and not just the price. Someone like Buffett is a value investor - he would prefer to buy cheap. However, he would also admit there is nothing wrong with paying 'full asking price' for quality, and he keeps hold of companies that he likes that are valued at fair prices. Indeed, he holds a lot of companies in the US which he could sell off if he thought the market was paying silly high prices for companies.

So, a high price does not necessarily mean you should not buy or that you should sell. The market consensus that drives the price, might be correct. Contrarians don't always win - they simply make the headlines more if they do. If you ignore the higher priced markets with higher imminent growth prospects, to go for cheap bargains: you may find that some of them are true bargains and some are just tat.

Ryan_Futuristics

Well it sounds like you're weaving your own interpretation on that article ... What I'm saying is quite clearly laid out:

“The correlation between equity returns and economic growth per person since 1900 has been negative"

Buying stocks of slower growing countries, with less euphoria, is basically a value strategy and buying the stocks of fast growing countries is a growth strategy; as Fama and French discovered in their groundbreaking 1992 paper, value usually beats growth.

Hence: 'paradox'


Now my spin on this is that it's NOT growth driving positive or negative returns ... Rather growth forecasts are driving investor sentiment, and investor sentiment is pushing attractive regions into 2 or 3x overvaluation, and unattractive regions (such as Russia) into half valuation

As growth fluctuates - and over 15 years you can see seismic shifts in growth across regions - you're left with the stronger underlying principle of mean reversion (to fair value)

Buying an overvalued region means you need earnings per share to grow just to catch up with the price you paid - it's not: can the US continue to grow? It's can the US grow a lot, and then grow some more?

bowlhead99

Ryan_Futuristics wrote: »

Well it sounds like you're weaving your own interpretation on that article ... What I'm saying is quite clearly laid out:

“The correlation between equity returns and economic growth per person since 1900 has been negative"

The difference in this statement you choose to use, and the one I used from the other part of the article that I quoted which they glossed over a bit, is that this one is per head, per capita.

They mentioned there is a positive correlation between growth and market performance when the growth you use is total growth, aggregate growth. All the growth drives all the market activity so over a long enough time period it has to work, even if the start and end points exhibit a bit of over- or under-valuation compared to what people were paying a bit before or a bit after. But growth being positively correlated to market values, which the researchers agree it is, is the opposite of your contention.

When you only use growth per head, which is not all the growth in the region, because you're ignoring the number of heads, then you may not find the positive correlation that one would expect. You might even find a negative correlation, which they did. Therefore, you may leap to a conclusion, because the statistics can appear to prove what you are looking for, and you can reverse engineer an explanation for it. IMHO you have to be careful to review the merits of the data points if you want to predict something useful from them.

Buying an overvalued region means you need earnings per share to grow just to catch up with the price you paid - it's not: can the US continue to grow? It's can the US grow a lot, and then grow some more?

The current price is assuming the US continues to grow. When it does, the price will look cheap compared to the earnings. Hence, the price will rise - presuming people still think it will grow. Over the long term, economies do generally grow. So, buying a solid growing economy is something that can be well worth doing.

Russia is looking cheap at the moment because it is an unstable high risk emerging market. That would be fine if it was high reward for the high risk. However, it is low growth. That is why people don't want to pay much for it. If it suddenly turns high growth, they will probably want to pay more for it. If you buy it while it is low growth or no growth you might make decent money when those parameters change. At the moment it is both low GDP growth per capita and low population growth. Hardly optimum conditions, unless you are prepared to forego better conditions elsewhere to play the waiting game and hope to catch a tide of change.

guymo

From the posts by Ryan F and bowlhead above, it sounds as though two things happen when there is economic growth:
1) investors pile in, so equities grow
2) the population grows, so GDP per capita slows and perhaps even becomes negative.

Right?

Ryan_Futuristics

bowlhead99 wrote: »

The difference in this statement you choose to use, and the one I used from the other part of the article that I quoted which they glossed over a bit, is that this one is per head, per capita.

They mentioned there is a positive correlation between growth and market performance when the growth you use is total growth, aggregate growth. All the growth drives all the market activity so over a long enough time period it has to work, even if the start and end points exhibit a bit of over- or under-valuation compared to what people were paying a bit before or a bit after. But growth being positively correlated to market values, which the researchers agree it is, is the opposite of your contention.

When you only use growth per head, which is not all the growth in the region, because you're ignoring the number of heads, then you may not find the positive correlation that one would expect. You might even find a negative correlation, which they did. Therefore, you may leap to a conclusion, because the statistics can appear to prove what you are looking for, and you can reverse engineer an explanation for it. IMHO you have to be careful to review the merits of the data points if you want to predict something useful from them.

The current price is assuming the US continues to grow. When it does, the price will look cheap compared to the earnings. Hence, the price will rise - presuming people still think it will grow. Over the long term, economies do generally grow. So, buying a solid growing economy is something that can be well worth doing.

Russia is looking cheap at the moment because it is an unstable high risk emerging market. That would be fine if it was high reward for the high risk. However, it is low growth. That is why people don't want to pay much for it. If it suddenly turns high growth, they will probably want to pay more for it. If you buy it while it is low growth or no growth you might make decent money when those parameters change. At the moment it is both low GDP growth per capita and low population growth. Hardly optimum conditions, unless you are prepared to forego better conditions elsewhere to play the waiting game and hope to catch a tide of change.

Right, I see the bit you're referring to ... Well if I sound dismissive of that, it's because the principle the article alludes to is something you see at every level of the market - it's something I first discovered for myself (Growth is exceptionally well priced in)

Here it is with stock selection - "Case in point: today, 12 of the cheapest (most terrifying) 25 large stocks are large energy stocks. Would you buy a portfolio that was 50% energy right now?"
http://www.millennialinvest.com/blog/2014/10/28/the-contrarian-sociopathic-mindset


So I don't disagree with your rationale on buying strong growth regions - but let's say growth is well priced in, and markets are efficient, what would your returns look like?

- Well they'd presumably look like typical growth figures ... They'd be around 7% for a good solid region like China; maybe the same for the US (annualised over a full market cycle)

If you're putting time and energy into managing a portfolio, is 7% a figure you should be aiming for?

The main reason I switched from passive to value investing is because we all see global growth slowing down

Ryan_Futuristics

guymo wrote: »

From the posts by Ryan F and bowlhead above, it sounds as though two things happen when there is economic growth:
1) investors pile in, so equities grow
2) the population grows, so GDP per capita slows and perhaps even becomes negative.

Right?

Possibly - but generally what happens when a region becomes more prosperous is birth rates go down (as Vietnam's gone from a very poor region in the 60s to a much wealthier region today, family sizes have gone from about 8 to 2.4)

With Japan today what you've got is negative population growth - so they actually have to bring lots of immigrants from S.America over to avoid their economy ageing and slowing further

My take on it is that market growth isn't particularly correlated to either - rather, fast growing regions like Asia have been better value

takesyourchances

I am still drip feeding away into my fund and share account into Woodford / City of London for my UK allocation, Murray International and Newton Asian Income. I should get good drip feeds done to these through the year for this portfolio I started late last year.

With the rest I am still drip feeding into my VLS and other side funds in my ISA etc and building everything up.

I have a few projects on this year so will need to also direct some more into cash to compensate these.

I have been reading away on the forum with interest lately so thought i would put a post on

Thanks

BrockStoker

Ryan_Futuristics wrote: »

so all you really need is for Russia to shake off a bit of bad press, and it could climb 30-40% without anything significant changing

It turns out Ryan was spot on with this analysis.

If you are still about Ryan, have you got any tips on how to call bottom during a correction? I have tried (and failed) a few times now, although on my last attempt (India) I may have come close (if there are no further falls!).

bowlhead99

BrockStoker wrote: »

Ryan_Futuristics wrote: »

so all you really need is for Russia to shake off a bit of bad press, and it could climb 30-40% without anything significant changing

It turns out Ryan was spot on with this analysis.

If you are still about Ryan, have you got any tips on how to call bottom during a correction? I have tried (and failed) a few times now, although on my last attempt (India) I may have come close (if there are no further falls!).

Wow.

As you can see from the above thread I had a bit of a back-and-forth with Ryan as while what some of the stuff he says is quite sensible and measured, he tends to believe his own hype a little too much and not want to explore widely enough some of the counterpoints to whatever view is his flavour of the month. You sometimes get that with people who have been investing for only a year or two and are working through the various bits of theory one piece at a time.

Still, if he called something spot on as you suggest, maybe it was not pure luck and I ought to accept graciously the fact that he knew it was time for a Russian recovery, and we should have over-allocated our portfolios to that high risk sector to make our 30-40% returns like he was saying, rather than keep the majority of our portfolios with the stable and GDP-growing markets of Asia and the West.

I know the Russian markets (combined with currency movements) had a big drop recently and then made a comeback, and feared you might be right - maybe he called it spot on at the exact bottom of the markets, and I was a fool for not listening, and we should listen out for his next tip on market timing. So I looked at what happened since the soundbite which you quoted.

The statement he made just after midnight 24 October was that without any change to fundamentals, if the bad press was forgotten you could get a rise of 30-40% from Russia. Let's look at a chart of two Russian specialist funds from rival active fund managers from that date and see if it went up 30-40% ?

Ah. No it didn't. What happened if you invested in JPM's Russia investment trust or Neptune's Russia/Greater Russia fund on 24 October when Ryan said, was that over the next 50 days you LOST 30-40%. That was the period of it being temporarily oversold, and it has now recovered, for an overall 2% gain in the last six and a half months. While the unstable, low-GDP-growth markets of Russia delivered their 2% in sterling terms, the FTSE UK All-Share delivered 12%. Other developed world markets did even better, so the FTSE All-World was more like 14% over those six and a half months.



Looking at other timeframes for the charts on Trustnet.com, if you had taken Ryan's advice that the market was distorted and you should pile into Russia earlier than that particular soundbite from him (say instead of 24 October you had invested on 24 September, or August, July, June etc etc) your Russian funds would still be down 10-20% while the UK or US ones were positive.

I hold some Russian and Eastern Europe exposure within my portfolio along with other emerging and frontier markets and I do think they should be a good long term hold. In some other markets you are paying a lot more per dollar of company earnings, but there are reasons why people are happy to do that; more than one way to skin a cat.

But going back to the original assertion that Ryan 'was spot on with his analysis' and could perhaps help you 'call the bottom'; check that chart again. His call of the bottom, which he had been calling for a while, was BEFORE a 30-40% fall. If you were in the markets which he said were way overvalued (All-World index is heavily US-influenced) you would have made 10% more in the six months since that particular soundbite of his.

As you've seen, it can be difficult to catch a falling knife. If you have a broadly balanced portfolio and rebalance it every so often, you will naturally be taking profits and moving money out of things that have done well into things that have not done so well and may be positioned to have the best recovery. Trying to call the bottom of a market stacked with economic or political risk is very difficult and so it can be best not to try.

Not sure Ryan is still around as he got quite frustrated with some other posters in a thread a month or two back and has been quiet since. He is probably busy with more CAPE analysis which will be a great predictor of markets at some point, just like a stopped clock is right at some point...