Why Emerging Markets Make Great Investments Part 2 : Precedent
By Thomas Connelly
The sudden explosion of economic growth over the past few hundred years is a fiercely debated subject today, with underlying geographical, political, institutional, cultural and racial undertones. It is not obvious that anyone in the discussion can transcend personal biases to see the real truth, and we will not attempt to solve that debate here. Longer life expectancies are attributed predominantly to two factors: increased sanitation and public health policy, and the advent of antibiotics.
Which brings us to where we are today. The first batch of “emerging market” countries, which includes developed Europe, Australia, New Zealand, the US, and Canada, were joined in the 1970s and 1980s by Japan, Hong Kong, and Singapore to comprise what we call “developed markets” today. “Emerging markets” today refers to countries we called “third world” countries when I was young — China, India, Mexico, Chile, Brazil, Argentina, Turkey, etc. (there are 25 to thirty emerging market countries today, depending on whose categorization scheme you prefer. All other non-developed countries are termed “frontier markets”).
What is different today is that there is precedent. Hong Kong, Singapore, Korea and Taiwan are all examples of former “third world” countries that have joined the ranks of the developed nations over a span of decades rather than centuries. Japan laid the groundwork in its remarkable recovery from the devastation in World War II. Developing countries know economic progress is possible, and there are a number of successful blueprints that point to it.
Populations throughout the world are increasing exposed to each other and their standard of living in a multitude of ways. Immigration, education abroad, business contact, and philanthropic endeavors bring people in the developed world together with their emerging market brethren, and the latter sees how the former lives, often first hand.
Courtesy Bridgewater Associates, LP, Versant Capital Management, Inc.
The person-to-person contact humanizes the difference in living standards. A less humanized and popularized vision of our standard of living is broadcast regularly through media outlets. The crucial point is that a small portion of the world’s population lives much more comfortably than the vast majority, and they desire a better standard of living. More importantly, this population knows a higher material standard of living can be achieved because other poorer countries have attained developed status. Populations in developing countries will be increasingly reluctant to sit still as the world progresses around them, and they see evidence of it daily.
Courtesy Bridgewater Associates, LP, Versant Capital Management, Inc.
Is there an opportunity here? We believe it is the dominant, long-term opportunity available to us today. Simply put, there are superior opportunities for economic growth in the long run, and traditional valuation metrics of emerging markets in the aggregate are low relative to developed markets, and low relative to history.
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