Emerging Markets are our Future
Updated: May 20, 2022
What will the world look like in 2050? Any credible answer to this question must, of course, be as complex as the question itself is simple.
"If you spend too much time on this question, you’re missing the point"
But answers too tend to fall into two simple, distinct categories: optimistic and pessimistic. The pessimists contend that modern technology is a Pandora’s Box which, in the hands of a naturally destructive species such as man, will eventually lead to our extinction. The optimists, on the other hand, argue that while we humans no doubt possess destructive tendencies, our overwhelming, and ultimately stronger urge is to progress, even if we go about it in a rather haphazard way.
If you had a long enough time horizon, you would be mad not to side with the optimists as there isn’t much downside to being wrong - unless you hold strong religious beliefs there is nothing worse than extinction. What is important, therefore, is not so much what the world will look like in 2050, but whether 40 years is long enough for the answer to become clear.
The future is emerging
If you decide that good will triumph over evil, and that the world will indeed as much in the next 50 years as it did in the last, you should have a large chunk of your portfolio in emerging markets. While there will be big winners within developed markets, many within the technology sector, it will be emerging markets as a whole that are the primary beneficiaries of progress.
Of course for most of us 40 years is too long anyway. The world is changing exponentially, not linearly, and invariably we reach critical points far sooner than we expect to.
Perhaps a good starting point in this exercise is to look at how the world has changed over the last 40 years and extrapolate. In 1969, I was 11 years old so my perspective might just be a useful one, at least to me. What will be the equivalent of the Internet in 2050? Nanotechnology? Cloning?
Indeed here lies the problem. Major technological advances nowadays are ones that will never be understood by anyone other than their protagonists. This marks a fundamental change in the nature of progress. That the world was neither the centre of the universe, nor flat, were major discoveries in their day, made by brilliant thinkers, but they were quickly understood by all but the most physically - and mentally - isolated. But understanding parallel universes, string theory and gravitational waves will, I suspect, remain the domain of the very few, while the rest of us remain ignorant beneficiaries.
Technology engenders growth
How technological progress affects the growth of emerging economies is evident in the long-term growth rates of certain countries in the early stage of their development. For example, from 1790 to 1865, the US averaged real GDP growth of 4.4% and in no ten year stretch was it higher than 6.4%. Fast forward a couple of hundred years, during which time there were extraordinary technological advances, and we now see countries like China able to sustain growth well above 10% for prolonged periods. What once took 100 man hours to build or make two centuries ago now takes perhaps a couple.
The emerging markets century
Indeed, as Warren Buffett said, “The 19th century belonged to England, the 20th century belonged to the US and the 21st century belongs to China. Invest accordingly.” But while China will certainly dominate the economic landscape for decades to come, we think the 21st century will belong to the emerging world as a whole.
And what will characterise the emerging markets century? In short, it will be unprecedented. The emerging world accounts for 85% of the world’s population. Never before has such a large proportion of the planet’s population been economically mobilised. Emerging countries are not going to get technology for free, but by the time it’s been made use of by developed countries, it tends to have been written down, and thus for sale on the cheap. Technology, once invented, has no variable cost.
Development phase one
But what makes the emerging markets century particularly exciting is home-grown innovation. The first phase of development of emerging economies was characterised by foreign multinationals setting up overseas plants. Postwar, American, Japanese or Western European companies would set up manufacturing plants in emerging markets and import virtually everything except labour from the home country, including their own managers, machinery, capital, technology and management techniques. Their purpose was to turn out inexpensive products for export to the mother country using local low-cost labour and raw materials.
Development phase two
Over time, these overseas plants nurtured a local labour force with global technology, trained local managers, set rigid standards for efficiency and service, and introduced management methods that spread quickly to their local suppliers and competitors. All of which set the stage for phase two, outsourcing and offshoring. In this phase, many traditional multinationals realised that it was no longer necessary to set up overseas subsidiaries. Local corporations enjoyed easy access to the capital markets, and could easily buy the latest technology and learn how to operate sophisticated machinery in huge plants. Local schools and universities produced an ample supply of skilled workers and engineers and, at a later stage, the Internet allowed instant communications and easy dialogue.
Development phase three
We are now entering the early stage of phase three, the emergence of world-class multinationals from emerging markets. The likes of Samsung Electronics, TSMC, Hon Hai, Hyundai Heavy Industries and Yue Yuen are now the global leaders in their respective industry while Hyundai Motor, POSCO, Lenovo, Infosys, Asus, Acer, Ranbaxy, HTC, Haier, Embraer and Tenaris, to name a few, are all world-class. These companies no longer rely on cheap labour or access to raw materials to provide key competitive advantages. A focus on superior execution and quality, emphasis on technology and design, branding, acquisitions, inventing new industry models, and cheap brainpower are what has given these companies a sustainable edge and got them to the top of the global leader board.
While the companies mentioned are likely to continue to grow at high rates, and generate excess returns on capital, they will no doubt be joined by others at the table, companies that right now are in their embryonic stage. Identifying them early is what makes the prospect of investing in the emerging markets century so exciting.
Warren Buffett and Charlie Munger have identified BYD, the Chinese rechargeable battery and auto company, as one of these future global leaders, but alongside BYD CEO Wang Chuanfu are many other entrepreneurs, not just in China, whose aim is to build the next Toyota, the next Intel, the next Google the next Glaxo the next Boeing or the next Walmart.
Nowhere is this trend more evident than in green technology. As venture capitalist John Doerr recently pointed out in his testimony before the Senate Committee on the Environment and Public Works, “If you list today’s top 30 companies in solar, wind and advanced batteries, American companies hold only 6 spots.”
Where are the other 24? Many of them are in emerging markets. China is investing $12.6 million every hour to green its economy. Other countries are equally energetic in their embrace of alternative energy technologies; they are setting targets and investing billions of dollars to spur the development of entirely new markets in wind, solar, geothermal, biofuels, energy efficiency, high-speed rail, and other clean and innovative solutions to global warming.
Is now a good time to invest in emerging markets? Frankly, if you spend too much time on this question, you’re missing the point.
Published in Aberdeen marketing
The views expressed in this communication are those of Peter Elston at the time of writing and are subject to change without notice. They do not constitute investment advice and whilst all reasonable efforts have been used to ensure the accuracy of the information contained in this communication, the reliability, completeness or accuracy of the content cannot be guaranteed. This communication provides information for professional use only and should not be relied upon by retail investors as the sole basis for investment.