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Inappropriate Labels

Summary

‘It’s rare that we use third party thought pieces but this month we have two excellent examples. Following on from ‘The Curse of the Benchmarks’, this brief piece underscores our mantra about avoiding inappropriate labels in asset management, especially the ‘Emerging Market’ (EM) tag.

‘It’s rare that we use third party thought pieces but this month we have two excellent examples.  Following on from ‘The Curse of the Benchmarks’, this brief piece underscores our mantra about avoiding inappropriate labels in asset management, especially the ‘Emerging Market’ (EM) tag.
Andy Seaman, Partner and CIO of Stratton Street Capital LLP, managers of the Wealthy Nations Bond Fund – a current holding in our Dynamic Fund, uses the latest work from the initiator of the EM tag to articulate its outdatedness.’
Antoine van Agtmael, the man who coined the term “Emerging Markets” is, along with journalist Fred Bakker, releasing a new book called “The Smartest Place on Earth”. In it they challenge the prevailing views of emerging growth spots – views of course which Mr Agtmael helped to pioneer in the first place but which are now 35 years old. The thrust of their new thesis seems to be that untold future growth potential lies, no longer primarily in less developed and distant shores but, in regions which can combine their underutilised brainpower and infrastructure to capitalise upon new opportunities of innovation. Areas like the US “Rust Belt” stand to benefit in a period where, “the global competitive advantage is shifting from cheap to smart”.
The term Emerging Markets first appeared in 1981 as an alternative to prevailing terms such as “Third World” (which incidentally refers to the undecided political stance of a country rather than its economic strength) or “****hole” which fairly accurately sums up much of the market sentiment at the time. The EM definition challenged the general lack of expectancy towards countries which had yet to adopt many of the industrial efficiencies, showing that this in fact meant more potential for growth not less. Since then China’s GDP has grown 40x larger and risen from 1.7% of global GDP to around 13.3% – close to that of the US (and a higher share in PPP terms). Countless other illustrations also prove Mr Agtmael’s original thesis but his terminology continues to be widely adopted often without appreciating their original foresight. Also markets continue to slavishly categorise countries with a term which, by its very nature, should become outdated and obsolete. The inflexibility of such definitions promotes the assumption that countries which were once undeveloped remain thus – even after decades of spectacular growth a country has difficulty shifting its typecast from the previous generation. Should, for example, a country with the highest per capita GDP and some of the most developed infrastructure still be considered Emerging Markets?
Moreover dividing countries between those that are already “developed” and those “emerging” suggests that the best opportunities for growth will continue to elude the former and remain in the latter. Messrs Agtmael and Bakker suggest this is not necessarily so. Take Tesla as a prime example; who would have expected that a new, potentially major, car company would emerge from the US after on average 100 years since the “Big Three” were founded, and within a decade of two of them (GM and Chrysler) almost going bankrupt. Even the idealistic Elon Musk (Tesla CEO) and team didn’t expect the ~300k pre-orders of their prototype “Model 3” so quickly after last week’s announcement – which requires a $1k deposit and when first deliveries are still almost 2 years away (hopefully end 2017 for those that ordered first). Such an example illustrates the potential for repatriation of businesses, jobs and growth to regions of the US that are already hungry and equipped for the opportunities and what has been called “The Fourth Industrial Revolution”.

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