This year’s top 10 stories included a peek into AustralianSuper’s international equities build out in London, AMP’s move to slash employee benefits, and plenty of hard-hitting analysis of the issues that matter in institutional investment. But the real story is how readers helped shape all of that coverage.
Orbis’ Stuart Place is riding from Melbourne to the Moon and Back to fund a treatment for the “monster of a disease” that his youngest son was born with. The investment industry is rallying behind him.
A stirring call to invest in emerging markets
It’s time to adopt a different view of emerging markets, according to Will Sutcliffe. Time to shake off the connotations of a third-world marketplace and recognise that the major emerging markets are the lands of giants, not demons. Such is the evocative view of Baillie Gifford and its emerging markets specialists.
Sutcliffe, the head of the Edinburgh-based global manager’s emerging markets team, who has been at the firm for more than 20 years, has written a research note, ‘Emerging Markets: Coming of Age’, which reimagines, again, the marketing of emerging markets to investors, which was first reimagined by J.P. Morgan in the 1980s.
Sutcliffe says: “Emerging markets (EM) have always been regarded as the investment equivalent of terra incognita. While the very term ’emerging markets’ was originally created as a clever piece of marketing to make it seem a less scary place – the bankers at J.P. Morgan knew that no-one in the early 1980s would buy the ‘Third World Equity Fund’ that Antoine van Agtmael was proposing – the connotations have been hard to shake.”
As is often the case, a good idea, like success, has many fathers. van Agtmael, rather than J.P. Morgan believes he came up with the term. He was reported in The Economist newspaper in 2008 as saying he had tried to start a ‘Third-World Equity Fund’ while working at the International Finance Corporation, but he had trouble developing interest among investors. “Racking my brain, at last I came up with a term that sounded more positive and invigorating: emerging markets,” he said. “‘Third world’ suggested stagnation; ’emerging markets’ suggested progress, uplift and dynamism.”
No matter who came up with the term, it has stuck for a long time.
Sutcliffe argues that for a more accurate picture of where the asset class is going, look at what’s happening on the ground. There may be giants, or dragons or monsters as feared in the distant past, but the giants today are the titans of the memory and processing technologies that make the world a better, smarter and safer place. “They are the colossi of the new energy supply chain that are helping to clear the skies from Shanghai to São Paulo,” Sutcliffe says.
“They are the hecatoncheires [mythological giants with 100 arms] of the internet world, pivoting from one sector of the economy to the next with customer offerings that vastly outstrip anything that has come before. They are getting bigger and better. And they are multiplying.”
Baillie Gifford places importance on quality in its investment style and looks at the persistence of return on equity as a good indicator. With EM the top quintile of stocks between 2008 and 2020 more than ROE compared with 1980-2007, halving the gap with developed markets.
“Our sense is that there has been a meaningful upgrade in the quality of the investment opportunities available to stock-pickers in EM,” Sutcliffe says. “We wonder if investors are paying enough attention to this shift. After all, most of the debate around emerging markets over the last decade has focused on the region’s failure to deliver much in the way of growth at the macro level. But if this bottom-up trend continues – and if, as we suspect is quite likely in the coming decade, it is accompanied by a far more benign top-down outlook – then the implications for the asset class could be profound.”
While the first batch of truly world-class companies in the EM came from Korea and Taiwan, the next generation is different, with most coming from China. “When the flywheel is a billion-plus home market, the need to go abroad is less pressing. But it’s not just domestic scale that has made world-class giants of Alibaba and Tencent,” Sutcliffe says. “Any lingering suspicion that they were mere copycats benefiting from large and protected markets should have been removed by Mark Zuckerberg’s admission that Facebook was far too slow to learn from WeChat.”
A mix of the impact of COVID and US trade sanctions have all-but guaranteed that China catching up with US technological development will become one of the most powerful investment themes of the next decade. “As a recent report from the Boston Consulting Group pointed out, US leadership of the global semiconductor industry – one that relies on a virtuous innovation cycle of R&D scale to stay ahead – could now be lost within as little as three years.”
Elsewhere in Asian EM, India now has the largest pool of IT engineering talent anywhere in the world – 8 million students have graduated in the last five years alone – and a long and growing list of start-ups and IPO candidates in the fintech and consumer internet space that are already valued at tens of billions of dollars. “There will surely be no shortage of Indian representation in our third wave,” Sutcliffe says. “It is highly likely that the world’s centre of economic activity will shift back towards EM in the next decade. It is also extremely likely that the beneficiaries of this growth will be almost exclusively home grown.”
– G.B.
