1. Viral Inflection

    Ewan Markson Brown, Investment Manager

  2. November 2020

    All investment strategies have the potential for profit and loss, your or your clients’ capital may be at risk. Past performance is not a guide to future returns.

  3. Recovering from Covid-19 may come to be seen as a turning point for Asia’s rising economies, writes Ewan Markson-Brown, co-manager of Asia ex Japan.

    “The current age of uncertainty might be defined thus: the old order has been undermined, but the shape of the new one is not yet clear. What determines how it turns out? Transformational technology? The sudden rise of China? Perhaps the consequences of unorthodox monetary policy? Most likely a combination of all these and more. What is certain is that, even amid this upheaval, the search for growth and the discovery of and investment in great companies will enable outperformance for the benefit of shareholders.”

    Who would have predicted 12 months ago that a viral pandemic would lead to such massive fear and probably the greatest quarterly collapse in US GDP in history? The old order, including both public and private institutions in the west, was tested and found wanting, socially, politically, morally and economically. In contrast, the Asian model, so far, has held up relatively well. China, the epicentre of the viral outbreak, is still on pace to become a superpower by 2030. In the ‘old economy’, and especially financial companies, we saw a collapse in share prices and corporate earnings. In the ‘new economy’ throughout the world, transformational technology helped ease the passing of the old ‘normality’.

    With the accelerated growth of the online economy (ecommerce, cloud and gaming) catalysed by Covid-19, the outline of the new order became clearer. In contrast, the consequences of monetary and fiscal reactions to the worldwide lockdowns, plus the political and social upheavals these will bring, have only just begun to filter through to asset prices.



    The Asia ex Japan strategy has prospered, by investing in some of the region’s great growth companies and holding these positions through significant volatility. We see no immediate prospect of escape from this turbulence. The global bond market is implying, via negative interest rates, asset destruction on an unimaginable level (the assumption is that money today is worth less than money in 10 years’ time). To look back invites oblivion, to stand still is death. Surely embracing the new and going for growth is the only way out? Well, possibly.

    The economic chaos and destruction caused by Covid-19 has ended a long positive economic cycle. Since the start of the pandemic, many businesses, previously kept alive by freely available cheap money, have failed. The pandemic has done what central banks have been afraid to do: create a Schumpeterian capital cycle where the role of the entrepreneur and innovation is paramount at the expense of entrenched, stale incumbents. This economic collapse has freed capital to work better for humanity. That is the good news. The possible bad news would be governments not allowing the market to allocate this capital effectively, intervening instead.

    For equity investors the main point is that the east looks better on most metrics than the west (given government debt levels, the price of money, regulation, etc), supported by some of the strongest growth drivers globally. These range from the continued rise of the Asian middle class and consumer, to Asia’s central role in supply chains, world trade and globalisation. Clearly the latter has recently come under pressure, especially with deteriorating US-China relations; however, it is also providing great opportunities for parts of Asia. Vietnam is one of the biggest winners of these trade disputes as it increasingly becomes one of the world’s most important manufacturing centres, capturing much of the manufacturing capacity leaving China.

    The start of a new cycle is almost always very positive for business owners. In fact, we would argue that this is possibly one of the best times to be a business owner in Asia: demand for products and services may have collapsed, but many competitors are insolvent, corporate profits are at a very low percentage of GDP, costs can be cut and when growth returns, operating leverage will be significant. We believe that the US dollar will probably be weak by historical standards, and capital will flow to Asia. Business profits have already bottomed and will rise rapidly from here. Old entrenched businesses may reinvent themselves and embrace the new and begin afresh.

    If we are too cautious because of the risk and uncertainty arising from investment in times of rapid change, we will lose the opportunity to outperform. Hence our continued willingness to seek opportunities for great company returns. Risk and uncertainty mean that we will inevitably make mistakes and that many of our investments will be less successful than we hoped. Our approach is to back current holdings, hoping they will outperform in the longer term, while continuously searching for stocks with the potential to deliver significantly enhanced returns over longer timeframes. We accept the volatility this strategy entails and investors should be mindful of this.

    The current global crisis is likely to create new secular trends and spur innovation. We believe that the Asia ex Japan region could be one of the major beneficiaries. The region is coming out of this crisis as an economic leader, in significantly better financial shape than western economies, with superior long-term growth prospects and more attractive valuations. The year 2020 may well be an inflection point where Asia ex Japan becomes a favoured asset class for the coming decade. We believe our strategy of investing in growth companies focused on the areas of technology and innovation is extremely well placed in such an environment. The risks and opportunities from increased disruption are here to stay. In our view, the market’s focus on geopolitics and capital flows misses the bigger picture and the opportunities created by global digital penetration, technological change and the rise of the Asian middle class. These fundamentals will underpin growth in the region for decades to come. The best way to invest in this rapidly-changing growth market is to find the best long-term growth companies; we call it ‘growth squared’.

  4. Important Information and Risk Factors

    The views expressed in this article are those of Ewan Markson-Brown and should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect personal opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.

    Ewan Markson-Brown wrote the article contained in this communication in October 2020 and no updates have been made since then. It represents views held at the time of writing and may not reflect current thinking.


    All investment strategies have the potential for profit and loss, your or your clients’ capital may be at risk. Past performance is not a guide to future returns.


    Any stock examples and images used in this article are not intended to represent recommendations to buy or sell, neither is it implied that they will prove profitable in the future. It is not known whether they will feature in any future portfolio produced by us. Any individual examples will represent only a small part of the overall portfolio and are inserted purely to help illustrate our investment style.

    This article contains information on investments which does not constitute independent research. Accordingly, it is not subject to the protections afforded to independent research, but is classified as advertising under Art 68 of the Financial Services Act (‘FinSA’) and Baillie Gifford and its staff may have dealt in the investments concerned.

    All information is sourced from Baillie Gifford & Co and is current unless otherwise stated.

    The images used in this article are for illustrative purposes only.


    Annual Past Performance % to 30 September Each Year

      2016 2017 2018 2019 2020
    Asia ex Japan (Pooled Fund Entities)   13.8 29.9 3.9 1.0 50.0
    MSCI AC Asia ex Japan Index 17.2 23.0 1.7 -3.2 18.2

    Source: Baillie Gifford & Co, US Dollars, net of fees.

    Changes in the investment strategies, contributions or withdrawals may materially alter the performance and results of the portfolio.

    Source: MSCI. The MSCI information may only be used for internal use, may not be reproduced or re-disseminated in any form and may not be used as a basis for or a component of any financial instruments or products or indices. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. The MSCI information is provided on an "as is" basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the "MSCI Parties") expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages. (www.msci.com)


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  5. Ewan Markson-Brown

    Investment Manager

    Ewan is an Investment Manager in the Emerging Markets Equity Team. He has co-managed the Pacific Fund since May 2014 and has managed Pacific Horizon Investment Trust PLC since March 2014. Ewan is a CFA Charter holder. Prior to joining Baillie Gifford in 2013, Ewan was a Senior Vice President in Emerging Markets at PIMCO. He previously worked at Newton for five years, most recently as Lead Portfolio Manager on an Asia Pacific Equity Strategy, as well as segregated Asian income and Japanese Equities Strategies. Ewan also previously worked for Merrill Lynch Investment Managers as a Portfolio Manager in the Asia-Pacific region for six years. He graduated MA in Politics, Philosophy and Economics from the University of Oxford in 2000.