A Current Perspective on Global Growth

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Simplegift
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A Current Perspective on Global Growth

Postby Simplegift » Tue Jun 13, 2017 6:40 pm

Where is economic growth occurring around the globe today? For the world’s major economies, the chart below shows their rate of economic growth on the vertical scale, and each country’s proportional share of global GDP on the horizontal scale. The chart thus depicts the relative scale of each country’s contribution to global growth in 2016, plus a forecast for 2017.

Based on simple demographics alone (and barring a catastrophe), the rapidly expanding economies of China and India will continue to dominate the global economic growth picture for decades to come. But which countries today are supplying the most products and materials to China and India, and most stand to benefit from their growth? The table below lists the top 10 suppliers of imports to each country (by value, in local currency):

Though U.S. companies are supplying 8.5% of China’s imports and 5.7% of India’s today, well over 90% of the imports to these large, fast-growing economies are being supplied by companies domiciled outside the U.S. — in Europe, Japan, South Korea, and elsewhere. As U.S. citizens and investors, with U.S. companies comprising over 50% of the global market cap, it's easy to overestimate the rather limited economic impact of American companies in the world today. Thoughts?
Cordially, Todd

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Simplegift
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Re: A Current Perspective on Global Growth

Postby Simplegift » Wed Jun 14, 2017 12:12 am

Another visual representation, showing a breakdown of projected global growth for the 2017-2019 period, as currently forecast by the World Bank (in real, inflation-adjusted terms):

Interesting to see Indonesia showing up on the chart, now the world’s 4th most populous country.
Cordially, Todd

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Re: A Current Perspective on Global Growth

Postby AlohaJoe » Wed Jun 14, 2017 12:37 am

Simplegift wrote:As U.S. citizens and investors, with U.S. companies comprising over 50% of the global market cap, it's easy to overestimate the rather limited economic impact of American companies in the world today. Thoughts?


I think it is easy to overlook the impact of sectors in Boglehead's discussions. I read "Cycles, Sectors, and the Perils of Aggregated Data" which was a bit of an eye opener. I've read similar comments in the past but not seen anyone lay out as much data before.

The author's point is that talking about "US versus international" can be misleading. Ford doesn't have a higher P/E multiple than Toyota, after all.

It seems to me that your charts reflect some of that same dynamic.

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Simplegift
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Re: A Current Perspective on Global Growth

Postby Simplegift » Wed Jun 14, 2017 9:03 am

AlohaJoe wrote:I think it is easy to overlook the impact of sectors in Boglehead's discussions.

Yes, I’m guilty of this myself. When comparing global equity markets, it’s easy to compare P/E 10 values across countries, without going to the trouble of correcting for the differences in sector composition between the respective countries. StarCapital has a chart that attempts to normalize these inter-country sector differences — but I’ve rarely used it.

In assessing over/under valuation of a given country, one can also compare current valuations to that country’s historical average valuation — since sector compositions within countries tend to be more stable over time. But then historical P/E averages can undergo secular shifts over long time periods as well, as we've apparently seen in the U.S. in recent decades.
Cordially, Todd

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Re: A Current Perspective on Global Growth

Postby sean.mcgrath » Wed Jun 14, 2017 10:54 am

I'm a bit surprised by the difference in the two tables. Where is China's energy coming from -- I didn't think they were self-sufficient.

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Re: A Current Perspective on Global Growth

Postby KlangFool » Wed Jun 14, 2017 11:03 am

Simplegift wrote:
As U.S. citizens and investors, with U.S. companies comprising over 50% of the global market cap, it's easy to overestimate the rather limited economic impact of American companies in the world today. Thoughts?



Simplegift,

And, that is a good thing if you invest on both. They are not as correlated as we think they are.

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Re: A Current Perspective on Global Growth

Postby Angst » Wed Jun 14, 2017 11:41 am

Great charts Todd, thank you for posting! It's amazing not only how high GDP growth is in both India and China but to see graphically how their value stacks up vs the rest of the world's economies. I can't help but wonder if there is any skepticism about those numbers coming out of China? Whatever, it's also another useful metric worth considering in the ongoing discussion in that other thread on Bogle leaning 100% US Equity vs Global Mrkt Cap. As I mentioned there, I think US company foreign sales alone is a crude metric to use to rule in or out owning international equity. Your focus here on GDP adds a different perspective. Not to divert your thread, but here are some more global stats which I think are interesting and might add more perspective to a discussion of global growth:

Global IPO Market Activity

Image

Source: http://www.ey.com/GL/en/SearchResults?q ... untry_name

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Simplegift
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Re: A Current Perspective on Global Growth

Postby Simplegift » Wed Jun 14, 2017 12:05 pm

sean.mcgrath wrote:I'm a bit surprised by the difference in the two tables. Where is China's energy coming from -- I didn't think they were self-sufficient.

China appears to be importing more and more of its crude oil from non-OPEC countries:

In contrast to India, the reason these oil-supplying countries don’t show up among China’s top 10 import suppliers is that, by sheer volume, China imports so much more than India. These energy-supplying countries are just further down on China's list, by relative value, than the other import suppliers.
Cordially, Todd

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Re: A Current Perspective on Global Growth

Postby boglephreak » Wed Jun 14, 2017 12:24 pm

i remain ignorant. if china and india are so large, why isnt this translating into a larger allocation to those countries in Vanguard Total Int'l? the top five countries are Japan (17%); UK (13%); Canada (7%); France (7%); and Germany (6%). China is 5% and India is 2.5%.

https://personal.vanguard.com/us/FundsH ... IntExt=INT

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Re: A Current Perspective on Global Growth

Postby Snowjob » Wed Jun 14, 2017 12:44 pm

And this is another reason why all "future" additions to my taxable account are in VT.

Own it all and hope for the best, diversification and simplicity all in one.

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Re: A Current Perspective on Global Growth

Postby Simplegift » Wed Jun 14, 2017 2:27 pm

boglephreak wrote:if china and india are so large, why isn’t this translating into a larger allocation to those countries in Vanguard Total Int'l?

The difference is that most developed countries are much more highly “equitized” than emerging countries. Their equity markets have been around longer, and have played a much larger role in providing a source of finance for economic activity. Thus these countries tend to have a higher ratio of market capitalization to GDP (in blue, chart below) and dominate the cap-weighted indexes.

Conversely, market cap/GDP ratios are generally lower for emerging economies whose local companies rely on other sources of finance like bank loans, government financing, and retained earnings. Also, a much smaller percentage of stock in emerging markets is actually investable by index funds. Many shares are owned by private family groups, government entities, or cross-owned by other corporations — and thus are not “free float.”
Cordially, Todd

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Re: A Current Perspective on Global Growth

Postby Valuethinker » Wed Jun 14, 2017 4:37 pm

boglephreak wrote:i remain ignorant. if china and india are so large, why isnt this translating into a larger allocation to those countries in Vanguard Total Int'l? the top five countries are Japan (17%); UK (13%); Canada (7%); France (7%); and Germany (6%). China is 5% and India is 2.5%.

https://personal.vanguard.com/us/FundsH ... IntExt=INT


Where a company is listed is not directly related to the size of its economy.

For example Switzerland is a small economy (8-9m people), but its stock market includes: Nestle (more or less the world's largest consumer products company, last time I checked), UBS & Credit Suisse (2 of the world's major banks).

Netherlands. Again a small country (20m people), but included are Unilever and Shell -- the former another one of the world's 5-6 largest consumer product companies, and the latter its 2nd or 3rd largest by market cap. (Joint London and Amsterdam listings which confuses things a bit).

UK. OK so these days it has a smaller economy than France or Germany. But it has HSBC, Glaxo Smithkline, Astra-Zeneca, Imperial Tobacco, British American Tobacco, Shell, BP, Vodafone, Diageo (Guinness), BHP & Rio Tinto (2 of the world's 4 largest mining companies), Glencore (ditto). Legacy of Empire-- all these huge multinationals that happen to be based in the UK or have a home listing of London.


China has some massive companies, but in terms of the index foreign investors cannot own large proportions of them.
Last edited by Valuethinker on Wed Jun 14, 2017 4:46 pm, edited 1 time in total.

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Re: A Current Perspective on Global Growth

Postby Valuethinker » Wed Jun 14, 2017 4:41 pm

sean.mcgrath wrote:I'm a bit surprised by the difference in the two tables. Where is China's energy coming from -- I didn't think they were self-sufficient.


The biggest source of energy for China is still coal. And it is still c. 80% reliant on domestically produced coal (that number is falling, as older, smaller and dangerous mines get shut down-- also Chinese coal consumption appears to have peaked). Natural gas is still relatively small-- importation of natural gas into China was only allowed relatively recently by the government.

As to transportation, yes, oil. They are a significant producer, but much is imported (something like 2/3rds from memory, but I'd have to check). I suspect they diversify their oil supply-- US has only just been allowed to export crude oil for the first time (the last Administration permitted some crude oil exports), there are various Gulf States etc. So they probably spread it between a number of countries (and I suspect the true number by country would be secret).

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Re: A Current Perspective on Global Growth

Postby Valuethinker » Wed Jun 14, 2017 4:45 pm

Simplegift wrote:Where is economic growth occurring around the globe today? For the world’s major economies, the chart below shows their rate of economic growth on the vertical scale, and each country’s proportional share of global GDP on the horizontal scale. The chart thus depicts the relative scale of each country’s contribution to global growth in 2016, plus a forecast for 2017.


Based on simple demographics alone (and barring a catastrophe), the rapidly expanding economies of China and India will continue to dominate the global economic growth picture for decades to come. But which countries today are supplying the most products and materials to China and India, and most stand to benefit from their growth? The table below lists the top 10 suppliers of imports to each country (by value, in local currency):


Though U.S. companies are supplying 8.5% of China’s imports and 5.7% of India’s today, well over 90% of the imports to these large, fast-growing economies are being supplied by companies domiciled outside the U.S. — in Europe, Japan, South Korea, and elsewhere. As U.S. citizens and investors, with U.S. companies comprising over 50% of the global market cap, it's easy to overestimate the rather limited economic impact of American companies in the world today. Thoughts?


Not sure how to entirely interpret these numbers.

If IKEA has a huge operation in China, which sources furniture from wherever (probably China itself) does that count as Swedish exports to China?

If Apple makes iphones in China, and sells them in China, does that go into the US number?

What about Pfizer, makes drugs in China, also sells them in China. In the imports? Buick is a big brand in China, assembled in China I presume. Imports?

What you get in the Chinese case is commodity producers, primarily. Manufactured goods that China consumes, are largely made in China (exceptions might be some luxuries) even if by foreign companies (or Chinese companies like Foxcon that supply foreign branded goods companies like Apple).

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Re: A Current Perspective on Global Growth

Postby wije » Wed Jun 14, 2017 4:49 pm

Simplegift wrote:
boglephreak wrote:if china and india are so large, why isn’t this translating into a larger allocation to those countries in Vanguard Total Int'l?

The difference is that most developed countries are much more highly “equitized” than emerging countries. Their equity markets have been around longer, and have played a much larger role in providing a source of finance for economic activity. Thus these countries tend to have a higher ratio of market capitalization to GDP (in blue, chart below) and dominate the cap-weighted indexes.

This is a great point. GDP growth does *not* correspond with stock market returns i.e. we can't use GDP growth as a metric to determine a country's future equity returns.

My big question is: is there a relationship between the growth of countries' capital markets and their future returns? In other words, will stocks outperform in countries "equitizing" at a faster rate?

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Re: A Current Perspective on Global Growth

Postby Simplegift » Wed Jun 14, 2017 8:33 pm

wije wrote:My big question is: is there a relationship between the growth of countries' capital markets and their future returns? In other words, will stocks outperform in countries "equitizing" at a faster rate?

There is a relationship, I believe, but likely the opposite of what investors might expect. In many emerging markets, with such rapid growth rates, companies must constantly be raising new equity capital — that is, issuing new shares, which dilute the per share earnings of existing shareholders (chart below).

In the most egregious example of recent years, the headline aggregate earnings growth of Chinese companies (in green below) has vastly exceeded the growth of their per share earnings (in orange). Profits are obviously growing in China, but they are being spread across a shareholder equity base that is growing even faster.

Not all emerging markets have share dilution of 15%-30% per year — but it's a hazard of investing in fast-growing emerging economies, where the interests of existing shareholders are not necessarily paramount. Investors prosper not on earnings growth, but on growth in earnings per share.
Last edited by Simplegift on Wed Jun 14, 2017 9:29 pm, edited 1 time in total.
Cordially, Todd

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Re: A Current Perspective on Global Growth

Postby TD2626 » Wed Jun 14, 2017 9:04 pm

It is interesting that just because something declines as a share of total GDP, that doesn't mean it decline in total if GDP is growing. For example, railroads were a huge portion of GDP 140 years ago but are a small fraction now despite rail freight still being big business. Also, over the last 100 years Britain went from empire to island and it's share of global GDP shrunk but it's long term stock market returns are decent.

This suggests that investing in growth countries is not necessarily the best way to success. Note that small growth is known as a "black hole".

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Re: A Current Perspective on Global Growth

Postby sean.mcgrath » Thu Jun 15, 2017 5:50 am

Valuethinker wrote:
sean.mcgrath wrote:I'm a bit surprised by the difference in the two tables. Where is China's energy coming from -- I didn't think they were self-sufficient.


The biggest source of energy for China is still coal. And it is still c. 80% reliant on domestically produced coal


I checked, and you are right: 15% net external energy for China vs. 35% for India (both growing like crazy).


World bank: China, India

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Re: A Current Perspective on Global Growth

Postby wije » Thu Jun 15, 2017 4:30 pm

Simplegift wrote:Not all emerging markets have share dilution of 15%-30% per year — but it's a hazard of investing in fast-growing emerging economies, where the interests of existing shareholders are not necessarily paramount. Investors prosper not on earnings growth, but on growth in earnings per share.

Sigh, so in other words countries with growing capital markets have the same problem as those with high GDP growth. You made a great case against expecting higher returns from emerging markets (esp China)! You wouldn't happen to know a site that lists earnings per share for countries, do you? :o

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Re: A Current Perspective on Global Growth

Postby wije » Thu Jun 15, 2017 4:34 pm

TD2626 wrote:This suggests that investing in growth countries is not necessarily the best way to success. Note that small growth is known as a "black hole".

I've always seen EM as "value" investments given their low CAPE 10s, PEGYs and P/Bs compared to most developed markets and believed the greatest challenge was to avoid countries that were value traps. Now it seems "growthy" EMs, even those with great valuations, might not deliver. You just can't win!

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Re: A Current Perspective on Global Growth

Postby Simplegift » Thu Jun 15, 2017 5:14 pm

wije wrote:You wouldn't happen to know a site that lists earnings per share for countries, do you?

Not earnings-per-share alone, but price/earnings-per-share (P/E): Global Index Briefing - MSCI Forward P/Es

This weekly publication reports forward P/E values for 46 MSCI country indexes. To find earnings-per-share alone, one might be able to look up the price of each individual country index, and then solve the P/E equation for the earnings-per-share number.
Cordially, Todd

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Re: A Current Perspective on Global Growth

Postby wije » Thu Jun 15, 2017 8:58 pm

Simplegift wrote:Not earnings-per-share alone, but price/earnings-per-share (P/E):

Ok I feel a bit dumb now, I had thought the E in P/E was total corporate earnings, not per share.

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Re: A Current Perspective on Global Growth

Postby Simplegift » Thu Jun 15, 2017 9:38 pm

wije wrote:I had thought the E in P/E was total corporate earnings, not per share.

If you read the fine print below each chart in the publication I linked to, this is the P/E formula used:

    “Price divided by 12-month forward consensus expected operating earnings-per-share.”
This is line with the standard definition of the P/E ratio, which uses earnings-per-share in the denominator — as best I know.
Cordially, Todd

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Re: A Current Perspective on Global Growth

Postby Valuethinker » Fri Jun 16, 2017 8:12 am

TD2626 wrote:It is interesting that just because something declines as a share of total GDP, that doesn't mean it decline in total if GDP is growing. For example, railroads were a huge portion of GDP 140 years ago but are a small fraction now despite rail freight still being big business. Also, over the last 100 years Britain went from empire to island and it's share of global GDP shrunk but it's long term stock market returns are decent.

This suggests that investing in growth countries is not necessarily the best way to success. Note that small growth is known as a "black hole".


The first point is absolutely correct.

Re the second:

- Britain went from the world's largest GDP perhaps around middle of 19th century (excluding the Empire -- include the Empire (India) and the Dominions like Canada and Australia, probably was the world's largest economy into the 20th century) to the 6th largest now, whilst it shrank to a single island (plus Northern Ireland, Isle of Man)

- the British stock market has always had an orientation towards international activity. So just look at the top 10 now: HSBC, BP, Shell, Diageo (Guinness, Johnny Walker), BAT & Imperial Tobacco, Glaxo Smithkline, Astra Zeneca, Vodafone - these are seriously international businesses

The link between British economic performance and stock market performance is significantly weakened by that. These companies do not do the majority of their business in the UK.

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Re: A Current Perspective on Global Growth

Postby wije » Sun Jun 18, 2017 1:57 pm

Simplegift wrote:This is line with the standard definition of the P/E ratio, which uses earnings-per-share in the denominator — as best I know.

This makes it all the more frustrating how Morningstar and others provide "Long-Term Earnings %" but not on a per-share basis. Using the information you gave and previous prices, I can calculate earnings per share in a backwards sense, but that doesn't indicate how earnings per share will move in the future. In other words, there's no way to really determine the trend of shares issued to compare with earnings growth.


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