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While pessimists point to a decade of underperformance as US markets powered ahead, optimists project that in 10 years’ time, emerging economies will account for two-thirds of global GDP. Charles Plowden is firmly in the latter camp. For the manager of the Monks Investment Trust and the Global Alpha Growth Fund, there are plenty of reasons to be hopeful about emerging markets.
Plowden’s optimism is founded principally on Asia’s vast young populations, increasing levels of education and adoption of new technologies at a scale and speed unmatched in the west. Increasingly, he proposes, emerging markets will be home to the biggest and best investment opportunities.
Investors should not be put off by perceptions of emerging markets as inherently riskier than developed counterparts. Plowden is clear: “Our view at Baillie Gifford is that volatility provides as many opportunities as it causes problems. As long-term investors, we worry about whether things are getting better in the long term or getting worse.”
With no certainty as to how the economic, political and fiscal situation will develop in the US and Europe, Plowden goes as far as to suggest that, on a ten-year view, emerging markets might even be less risky than their developed counterparts.
In contrast to the stuck-in-their-ways developed world, hindered by ageing and decaying infrastructure, countries such as China or Indonesia are more fleet of foot. They articulate a clearer national purpose and drive to repeat the success of South Korea, home to Samsung Electronics and Hyundai Motors. Korea went from being one of the poorest countries in the world in 1960 to the 12th richest today.
Plowden believes this kind of success can be replicated across emerging markets, “In less than one generation many of these countries could catch up with western living standards, which is a mouth-watering prospect for a growth investor.”
History suggests it is possible. After all, Asia, principally China, was the leading driver of world culture, science and economic activity for centuries preceding the 16th century. The west then became the leading world power thanks largely to an edge in military technology and the resources this allowed it to accumulate – gold and slaves included – from the then undeveloped world.
Now Asia is reasserting itself. The question is not whether China will be the leading world economy, but when? Will it be 10 years or 20 years? Seen through this lens, US President Trump’s trade war with China and imposition of US tariffs are the futile throes of an America clinging to global leadership.
Thinking a decade ahead, Plowden’s interest has been caught by two themes, the first of which is consumption. With more disposable income, he believes people in emerging markets will start to eat better food, to seek out branded goods, to be aspirational in their lifestyles. Once people reach the approximate levels of that exist in China and across much of Asia today, he suggests they begin to start thinking not just about consuming more and higher-value goods, but of securing their and wealth their children’s future, through improved education and health. The same impetus leads them to consider long-term savings: the second theme he sees unfurling across emerging markets.
Here, part of the draw is government support for a limited number of very strong financial companies in a tightly regulated market that discourages new entrants. As a result, they get a disproportionate share of what is an enormous, possibly 30-year growth market. Plowden says, “Looking at competition between them misses the point that this is a market that can grow 20 per cent a year for the next 20 years and could be many, many multiples of its current size.”
With all these changes taking place in emerging markets, investors in the developed world are going to find themselves increasingly irrelevant to those running multibillion-dollar companies from China. It is the investors who will have to make the effort to get closer to Chinese companies, and not the reverse, hence Baillie Gifford’s decision to open a small research office in Shanghai. As Plowden explains:
“It will be staffed by locals who understand the culture, who can speak the language, who can go out and put Chinese companies through our research framework and pass those views back to Edinburgh”.
For investors willing to accept the rebalancing of the global economy and to adapt their investment processes to suit, Plowden sees plenty of grounds for optimism for global portfolio managers willing and able to look in the right places for growth.
To hear more on emerging markets from Charles Plowden listen to Short Briefings on Long Term Thinking.
The views expressed in this article should not be considered as advice or a recommendation to buy, sell or hold a particular investment. The article contains information and opinion on investments that does not constitute independent investment research, and is therefore not subject to the protections afforded to independent research.
Some of the views expressed are not necessarily those of Baillie Gifford. Investment markets and conditions can change rapidly, therefore the views expressed should not be taken as statements of fact nor should reliance be placed on them when making investment decisions.
Baillie Gifford & Co and Baillie Gifford & Co Limited is authorised and regulated by the Financial Conduct Authority (FCA). The investments trusts managed by Baillie Gifford & Co Limited are listed UK companies and are not authorised and regulated by the Financial Conduct Authority.
Investments with exposure to overseas securities can be affected by changing stock market conditions and currency exchange rates. Investing in emerging markets is only suitable for those investors prepared to accept a higher level of risk. This is because difficulties in dealing, settlement and custody could arise, resulting in a negative impact on the value of your investment.
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