The
whole
story

Now some of you may feel that 2,000 years is too long a horizon for perspective, no matter how enlightening. So let’s be more short term, and take just the last 109 years, i.e. the brief period of human history that this unlimited liability partnership has been investing in global equities. To repeat the italicised observation from a couple of paragraphs ago – the most amazing feature of the graph is that during the 20th century – a period encompassing two world wars, a great depression, and numerous stock market and economic crises – the rate of GDP growth per capita has continued to rise. This is the true story, the whole story, the most important story for long-term investors. Those wallowing in the marshlands of current news flow miss it entirely. No wonder we need to go around cheering up our clients.

Two books which cover this phenomenal century of progress very well are Steven Pinker’s Enlightenment Now and Hans Rosling’s Factfulness. Both chart how much safer, healthier, less volatile, more prosperous the world is now than at any point in the past. The books depict the true narrative – the life-saving narrative of the ‘Points of View’ advert – a narrative we never hear about since it is gradual, positive, and therefore not of relevance to fight-or-flight. Here, as snippets, are two century-defining graphs: extreme poverty from 1800 to today:

Note that in the last 20 years the percentage of humans living in extreme poverty is falling faster than ever before. Much of this is thanks to the economic miracle ascent of China (of which more in a second).

Extreme poverty rate from 1800 to today

Source: Based on free material from gapminder.org, cc-by licence.

Even more emotively, here is the graph of worldwide infant mortality over the past half century. In 2015 worldwide infant mortality had fallen to 4.3%, from 19% as recently as 1960, and a hard to contemplate 36% in 1900.

As Rosling and Pinker both note, there is nothing that causes more heartbreak than infant mortality; if you knew nothing else of the last century it hardly matters – this improvement alone takes precedence over all else.

The same question, then, tilted at 2018: does anything in the paragraph of doom really risk changing the sweeping, life-affirming progress of the last two graphs? No.

Now we have entertained a different perspective, we can circle back to the salient narrative moments from our perch of the last 12 months. To signals that we find useful, signals that inform our view of the future – like the cost of sequencing a gene falling to $1,000 in 2014; this is from $2.7 billion to sequence a gene in 2003, thanks to the San Diego based gene sequencing company, Illumina. Having brought the costs down to $1,000 in 2014, it now believes its current generation DNA sequencer will allow $100 sequencing soon. Underpinning the likes of Illumina are the signals from ASML, the Dutch semiconductor group, that they believe Moore’s Law can continue for at least another 10 years thanks to their newest extreme lithography machines that started shipping in 2018. (Remember Gordon Moore first wrote about this in 1965; Moore’s Law has been going for over 50 years already, defying generation after generation of it-can’t-continue naysayers).

Infant mortality rates 1950-2010

Deaths per 1,000 live births.
Source: UN World Population Prospects, 2012 Revision.

In the same vein, my colleague Mark Urquhart came back from China (one of many trips there in the last 12 months) in awe of the continuing progress by companies there, and of the gulf between our doom-mongering about China and the on-the-ground evidence of rapid progress and increasing confidence shared among the many. The future, as the saying goes, is here already, it’s just not evenly distributed – and China is where you find much of the future today. Who ever heard of apartment buildings being built with no kitchens and a lift specifically for online food delivery? Hence Meituan Dianping – an online delivery company that didn’t exist four years ago and now has 300 million customers.

And, perhaps hard for us to believe, the conversations in Chinese board rooms of high growth companies are not dominated by Brexit or Gilets Jaunes. They don’t merit a mention. Partly for this reason we are establishing a permanent research office in Shanghai in 2019. We want to be there absorbing the alternative narrative year round, and furthering the many connections we have made from our big, long-term investments in Baidu, Tencent and Alibaba. The next generation of innovative Chinese companies is looking for the right shareholders and our name keeps coming up – this is great news for our edge in investing in unlisted companies for some clients, and all our clients will benefit from this as these companies in turn go public.

Our polar-opposite narrative doesn’t stop in China. Take Tesla. Surely 2018 was when those short sellers saw their persistent malevolence pay off? Pan that camera up again. When we first bought Tesla (six years ago) the company had made under 5,000 cars in the previous 12 months. They made more than 80,000 cars in the last quarter. No car company – since Ford’s Model T – has even got close to such a ramp up. It’s a feat little short of astounding. The production level means that Tesla are unlikely to need more capital despite the huge investment it’s been putting in. We’ve believed this – mainly in splendid isolation – for quite a while. And as for Elon Musk’s sometimes wayward behaviour? Well, the outcome – increased independent challenge on the board and a tweet checker – is a good one. We’d admit the path to get there was occasionally uncomfortable, but readers of Robert Frost’s The Road Not Taken already know this.

Of course, we are not totally Panglossian. We do have some questions that (almost) keep us up at night – but they centre around the long-term growth trajectory of our companies, in particular the role of regulation for the ones that have become massive dominant players in their industries. Facebook and Google dominate online advertising, but can the former implement the right amount of content policing and editorial responsibility to assuage the authorities? Will the latter come a cropper with its arrogant attitude to Washington? How much will regulation of gaming impact Tencent’s growth rate, or has the story moved on from gaming already? Will Baidu’s search function be increasingly by-passed? Illumina has doubled in just over two years – is there still enough upside from here? And so on. There is no complacency, just musing from a different perspective.

At Baillie Gifford we have gone to great lengths to find different sources of information to embrace different narratives from the ones trotted out in the Financial Times or The Wall Street Journal. We ask of events: “Will this change the 2,000 year GDP per capita graph? Will this slowdown the rate of technological progress of the last 150 years?”

One moment from the last 18 months encapsulates the strands of our current narrative rather superlatively. Imagine not that you are in a side street being charged by a skinhead, but that you are at the side of another road entirely. It’s a very flat, smooth, serpenting stretch of bitumen, lined with barriers for 12.9 miles, in Rhineland, Germany. And it’s called The Nurburgring. At 10.03am, on May 17th, 2017, you blink disbelievingly as a cobalt-blue car shoots off silently as though Back to the Future’s Doc Brown’s flux capacitor has disrupted the space-time continuum – 6 minutes 45 seconds later cobalt-blue flickers past the finish post, decelerates effortlessly, and eases towards a gaggle of iPad clutching, hushed-tones-chattering, white-coated engineers.

The all-time Nurburgring record – a magical title fought over the decades by Porsche, or Ferrari, or McLaren or any number of glory hunting, afterburner engaging, ear muff requiring, Formula One piloted, jet-fighters-on-wheels – was whisked off by a silent electric vehicle, made by a Chinese company (NIO) that didn’t exist three years ago, and had never sold a car. It’s a back-to-the-future moment, a symbolic return to leadership from the East.

And that’s the problem with following our normal news narratives: preoccupied by skinhead scare-mongering, we look up and realise human advancement has left our thinking way, way, behind.

Welcome to the future, McFly.