For much of the last decade Global Emerging Markets (“GEMs”) have underperformed those in the developed world, despite consistently higher economic growth rate, more exciting demographics and less damage suffered in the Global Financial Crisis of 2008. There are a number of reasons why this alluring macro has not consistently translated into more exciting market returns. For the most part this has been an understandable negative for allocators: why bother to venture to countries they have not visited and buy into companies they have never heard of when they can invest in Apple or LVMH or Unilever?
Although the macro backdrop is not the main driver of our bottom up, stock picking process, it clearly pays to be aware of the big picture and it seems to us that the outlook for GEMs appears extremely favourable for 2021 and beyond. There may also be reason to believe that this positive economic development may not in the coming years be lost in translation when it comes to stock market performance as it has done in the past.
Encouragingly, economic growth continues to accelerate across Asia, despite Covid. Whilst we remain vigilant, the evidence supports our expectation that the recovery in Asia will be quicker than it is forecast to be in the western hemisphere. China stands out in this and despite all the finger pointing over Wuhan is enjoying the benefits of Covid FIFO: one of the few countries likely to register GDP growth this year as a result of its earlier and draconian clampdown at the beginning of the year.
Consensus forecasts for 2021 indicate a dramatic economic rebound in Asia next year, ranging from an 8% growth rate in India and China to 3% in Taiwan, with a number of other countries in South East Asia growing in excess of 3%.
The fiscal and monetary response from Asian governments has not been nearly as expansive as in America and Europe, where government backed lending support schemes have massively inflated the money supply. In India, bank lending growth for the first nine months was running at a mere 5.5% while in Indonesia there was almost no growth at all, and in China where bank lending data is opaque, M2 growth, (a reasonable substitute), is averaging only about 10% this year, which is well below its long term average.
The economic background therefore looks to comprise an appealing cocktail of low inflation, a sharp recovery in economic growth, improving liquidity and governments which remain solvent and fiscally prudent. It is worth recalling that Asia now accounts for over 50% of world GDP, and some 60% of world economic growth, a position that looks likely to improve even further over the next few years, aided by a very pronounced demographic advantage.
China and India comprise some 90% of our portfolio heading into 2021 with almost 55% in the former and some 35% in the latter and this despite the clear difference in the responses to Covid. As mentioned above China was early and uncompromising with a Party stalwart standing guard at every housing complex, an accurate tracing system through peoples’ mobiles all topped off with a strong sense of communal duty amongst the citizenry. In contrast, India was more chaotic with national and state rules causing uncertainty and the eventual clampdown stoking infection as unemployed city workers dispersed to their villages in the country. In contrast to China’s GDP growth, India’s economy is forecast to decline by almost 9% this year.
That we are seeing positives in both countries is a direct result of our continued virtual meetings with companies. eCommerce has been an obvious beneficiary of the virus as consumers have had to shop from the comfort of their own homes thus accelerating and, in some cases embedding, a structural growth story that was already in play. Meituan’s success is a clear example of this with Covid providing the company with a clear opportunity to widen its home delivery of meals to food delivery and a range of other goods and services. Of course, Chinese consumers will increasingly frequent restaurants as they did in bygone years but will they stop using Meituan’s other services when we return to “normal”?
So too in healthcare: the development of the online offering has been accelerated and will become part of the new normal as a necessary adjunct to a national health system for over 1.4 billion people. The catalyst for this development has been a recognition by the government that online healthcare services can be more quickly introduced to a much wider national audience. Beijing has introduced a means for online healthcare providers to be reimbursed from the national healthcare system. Alibaba Health is a clear beneficiary of this accelerating trend. We Doctor is another.
We added substantially to our weighting in India in the second quarter as a number of high-quality stocks on our watchlist fell back into our valuation range. Again, we have found structural growth stories given extra impetus by the pandemic. With limited opportunities to travel and entertain in the pandemic Indian consumers have been increasing their spend on discretionary items. The leading retail jewellery operator, Titan Industries, has highlighted that though lavish wedding expenditure has declined and holidays abroad have been postponed, a proportion of the money saved has been redirected into expensive trinkets. The CEO recently told us that YoY sales are now positive. Not bad from the second quarter low.
Even the more modest monetary stimulus provided by the Indian government is providing support for increased lending to the consumer. At the upper end of the employment scale there is increasing demand for property (as reported by HDFC Bank) whilst workers with more modest salaries are enjoying access to consumer finance through companies such as Bajaj Finance.
The obvious advantage of eCommerce has also been evident elsewhere. SEA Limited’s rise in its local markets translated into good gains for us and reflected how Indonesia is moving into the sweet spot of growth for the obvious benefit of companies that can achieve dominance. Just as we saw in China several years ago with Alibaba and Tencent, profit growth of 40-50% is the prize for the market leaders.
We all hope that the world gets back to normal next year. But what that new normal entails is a matter of conjecture. As well as the businesses and sectors described above, we are keeping a close eye on several other trends. One of these is the development of digital content platforms that appeal to comic and gaming enthusiasts which have successfully expanded into other related fields such as life-style, food and entertainment. In Q1 this year 850m Chinese were watching this stuff. Another trend is the increasingly widespread adoption of live streaming in China. This phenomenon has been the norm in the online retail industry for some years but is now expanding from lipstick and jewellery into the hallowed grounds of mutual fund sales. Whatever next?
