Looking at the big picture

Emerging markets are a no brainer.

We are constantly told, as investors big and small, that we must invest with the long term in mind. We are reminded that there are no quick gains or easy wins and we should stick it out through the cycles. That’s all fine, but why then is investment comment all about what the market is doing today, tomorrow and next week?

Where is the big picture perspective? Under these noisy and volatile circumstances it can sometimes be quite difficult to stay the course.

I want to use the recent reporting on emerging markets as an example. Recent headlines about emerging markets are feeding a certain narrative: “Geopolitical risks weigh heavily on emerging markets” (Moneyweb May 14 th ), “This is a dangerous market – Morgan Stanley emerging markets chief” (Businesslive June 26 th ), “US-China trade war: Emerging markets most at risk” (Fin24 June 28th), and “The biggest threats to emerging market ETFs” (ETF.com July 5 th ).

It’s true there has been significant volatility in EM’s this year – fuelled by global and local politics. By the end of 2018 there will have been 24 elections within emerging market countries. That’s enough to give most investors the heebie-jeebies, without factoring in rising protectionism and trade-wars. So we can expect EM volatility to continue as the likelihood of election surprises and non-market friendly policies continues.

Add to this a strong dollar, rising interest rates and a steadily increasing oil price – all of which create challenges for EMs.

In addition, investments in the west seem poised for growth: S&P 500 companies are on track to post strong earnings compared with last year as the economy grows and US tax reform drives capital investment.

Put all of this together and the selloff in EM currencies and stocks seems to make sense. But does it really? I can’t help thinking that some investors have been very quick to dismiss EMs as too risky.

I recently read the book Factfulness by Swedish public health professor Hans Rosling, which is a lesson in big picture thinking – in fact it changed my outlook on the world. He notes that of the 7.6 billion people on the planet today, roughly 1 billion live across North and South America, 1 billion in Europe, 1 billion in Africa and 4 billion in Asia (numbers have been rounded).

By the end of the century, according to UN statistics, there will have been no population change in the Americas and Europe, but there will be 3 billion more people in Africa and 1 billion more in Asia. In other words more than 80% of the world’s population will live in Africa and Asia.

To some people, who picture impoverished communities with little access to health-care and education, this is a scary picture. However Rosling paints a completely different picture of the world today and in the future, using verifiable statistics.

He divides the world into four income levels, expressed in terms of dollars of income per day. According to this 1 billion people live on level 1 at less than $2/day; 3 billion live on less than $8/day (level 2); 2 billion live on less than $32/day (level 3) and the balance – about a billion people – live above that on level 4.

At current levels of progress, by 2040 half a billion people will remain on level one, while 2.5 billion will have moved to level 2 and over 4 billion people will be on level 3. Just over 3 billion will have moved to level 4. This represents significant change.

Also, think about this. Today, 60% of level 4 consumers live in Europe and North America. By 2040 60% of level 4 consumers will live outside the West.

It may sound overly dramatic but Western domination of the world economy will soon be over. Surprisingly enough, I think the person who understands this best is Donald Trump – it explains his bullying behaviour.

So if you and I are investing for the looooong term, where should we look?

One set of investors that seems to look beyond the noise is investment firm Grantham, Mayo, & van Otterloo, more commonly known as GMO. This is the team, under investment strategist Jeremy Grantham that predicted the dotcom bubble in 2000 and the housing bubble in 2007.

To be fair, I should add that the nature of Grantham’s approach means that GMO tends to underperform during bull markets and  outperform when markets correct. This means that over the past few years the firm’s funds have underperformed many of their peers and  clients have apparently withdrawn $40 billion since 2014.

That said, the man is a legend and I tend to read research the firm puts out. A wee while ago GMO released the latest in its 7-year asset class forecasts, which suggests that emerging market equities are likely to generate the best real returns over the next seven years.

Makes you think, doesn’t it?

Happy investing, Sasha. 



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