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23 April 2019 Jonathan Faurie

Emerging markets are the new trendy destination when it comes to investments. No matter the company or the industry that they are investing in, they are finding significant opportunities in emerging market exposure.

This was a major talking point at the recently held Glacier International Roadshow. 

Look for commonality

While there is an increased interest in emerging markets, Ian Beattie – Co-Chief Investment Officer at NS Partners – pointed out that it must be remembered that not all emerging markets are the same and that investors need to be very clear about what defines them and sets them apart from each other. 

The best place to start is to look for the commonalities between emerging markets. Beattie pointed out that by 2020, China and India will account for the second largest middle-class economies in the world. 

This will be driven by several factors. China is on a mission to be the biggest technology-based economy in the world by 2025. This will eclipse Silicon Valley where the majority of the world’s biggest technology based companies are located. In future, the likes of Huawei and Alibaba may tower over the likes of Apple and Amazon. 

Centuries ago, India was seen as an agricultural powerhouse that provided the world with key commodities that drove their economies forward. In the age of discovery, the spice trade saw many explorers looking for a way to get to India in order to purchase spices. 

India is once again investing significantly in agriculture which will make it a future giant in this space. 

“One of the key investment philosophies that companies need to follow is that they invest in companies and not countries. This was done effectively in the past and has been a major growth driver,” said Kevin Johnson, Portfolio Manager and Analyst at Dodge & Cox.   

Improved disparity

The rise in the middle class in China has significant meaning and is important for the financial services industry. 

In the past, poverty in China was on the rise and there was a significant gap between the upper class and the lower class. The middle class in China at the time was so small that it was not even worth mentioning.

“The establishment of the rising middle class in China has seen a significant shift in income disparity in a positive direction. What does this mean? As the income disparity shifts, companies can sell their product for twice the price that they are currently selling it because there will be a significant demand in these markets. As populations become wealthier, the whole population can drive demand for products,” said Beattie. 

This is seismic shift is import for insurers. For a long time, South African insurers have been looking into cross border expansion as profits have come under fire. Strategic partnerships are key to this profitability and we have seen some South African insurers realizing the potential that the Asian market can offer.  Perhaps China is the next pot of gold when it comes to growth? 

“As wealth accumulation takes place, wealth management takes off. There needs to be a significant focus on emerging markets,” said Beattie. 

Shifting focus

As the world shifts gears when it comes to the dynamics that are driving the financial services industry, fund managers need to shift their focus when it comes to the way that they go about their business. 

According to Iain McCombie, a partner at Ballie Gifford, the current failure of fund managers to focus on actual investments is letting clients down. According to McCombie, the industry is currently based on abstract concepts and complexity. Further, success is about fund managers outsmarting their peers and not finding value for clients. 

“We are currently locked in a costly arms race for better, cheaper analysis. How is this benefitting the client? We need to be identifying and backing investment ideas that will generate significant alpha. We need to approach this from a client’s point of view,” said McCombie. 

He added that there is an easy way to achieve this. Investors should think in decades and not quarters and they should focus on substance over noise. At the end of the day, the client needs to be put first. 

What does the future hold?

From listening to all of the presentations at the seminar, the general consensus is that the world is currently in an extended growth cycle which is slowing down. There is a lot of political uncertainty in the world; the impact of the US trade war with China is still an unknown factor and there is still significant uncertainty regarding the UK’s position in the EU. 

Neil Padoa, a Portfolio Manager and Head of Global Research at Coronation Fund Managers, pointed out that there is significant danger associated with a global recession which may be caused by the US Trade War and Brexit. 

“When there is a significant wealth divergence, people feel left behind. When this happens, political opinions swing in a specific direction. This is a time when socialist agendas come to the fore and a time when companies need to look at the macro risks driving the market. The inabilities of Central Banks to stem the flow of this slowdown is a major global concern,” said Padoa. 

Editor’s Thoughts:
Emerging markets is big news for asset managers; however, timing is important. If we are at the end of an extended growth cycle, companies need to make their cross-border expansion moves before this cycle stops. As we have seen with recessions in the past, the breaks will be applied quickly and harshly. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.

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