East meets West: Investing in The Network Effect
- 10 February 2012
One tactic stems from the Institute for Public Policy Research in its recent report on globalisation, which includes a graph showing the ‘network effect'.
But what is this? Simply, it aligns what Britain is good at with demand in the BRIC (Brazil, Russia, India and China) countries. After all, with BRICS to become the new global titans as the centre of the world's wealth shifts eastwards, this is a good starting point.
A pointer for future investment success
This movement was described by the IPPR as "a journey of perpetual movement up the value chain" for developed countries.
For example, the graph shows that the UK has a comparative advantage in sectors including financial services and pharmaceutical, among others, whereas at the opposite end of the scale ones to avoid include film and TV, and agriculture. Not only does this demonstrate where the UK economy should focus its investment, but for the individual investor it is a useful guide.
Far wiser to invest in a company with an eye on the future than betting against the tide
So let's take a look at which sectors and stocks are moving up the value chain:
There is no denying that this is a mega-trend, with increasingly wealthy populations in China and Japan setting up bank accounts for the first time, and requesting other financial products.
This sector is the first wave of globalisation, according to the IPPR. The two stalwarts of British banking that are thriving on emerging market demand, HSBC (HSBA) and Standard Chartered (STAN) make prime examples on how enduring competitive advantage can be. Last month, HSBC Chief Strategist Philip Poole told clients that there was some steep value in some of the big emerging markets, reports Forbes.
An acceleration in infrastructure growth is expected in emerging economies. Developing countries are piling money into roads and railways as they grow and deal with urbanisation.
A spokesman for Henderson says: "The prospects for an improved quality of life and better wages will cause the urban population in emerging markets to swell by a billion between 2010 and 2015 to 3.5 billion according to the United Nations. China is a key example of this, with just over 680 million now living in its cities, these workers have moved from the mountains and paddy fields to end the country's centuries-long agrarian status.
"This mass influx of new inhabitants to cities places a strain on basic services such as public transport, roads and electricity, creating a pressing demand for investment in infrastructure. Mining companies benefit from urbanisation as vast amounts of raw materials are needed to build homes and offices, transport routes and industry."
You could invest in a specialist infrastructure fund, or a mining company such as BHP Billiton (BLT) or Rio Tinto (RIO), to take advantage of this. Alternatively, BG Group (BG) boasts unique positions in Brazil, and global markets which is "virtually impossible to replicate", according to Virginie Maisonneuve, Head of Global and International Equities at Schroders. It has achieved exploration success in Brazil's massive Santos basin, and is tipped for future success driven by developing economies. Gas, in particular, will benefit from efforts to mitigate climate change given its low carbon intensity relative to other conventional fuels.
An ageing global population will see a boom in pharmaceutical companies, and there is an array to choose from. Emerging markets represent an important source of future business for health care companies, as their populations are huge and growing. As GDP growth continues in emerging markets, roughly 100 million people are added to the middle class each year, and they are investing in health care for their families.
Rohit Talwar is CEO of Fast Future Research a global research and consulting company that helps governments and global companies to explore and respond to the ideas, trends and forces shaping the next 5-20 years.
He says: "We anticipate significant growth in those providing services to an ageing population. Life expectancy is rising by over 40 days a year in developed economies, and actuaries tell us that a lifespan of 100 or more will be commonplace for those under aged 50 today. Those aged over 65 also tend to have at least 50% of the wealth in most developed economies."
Maisonneuve adds: "The role of the large emerging market economies should be a key consideration for all investors. Fifty per cent of global corporate growth – not to mention 98% of population growth – is now occurring outside the developed world. Global companies with a footprint in the bourgeoning economies of Asia and the emerging markets are poised to do well in the long term and this should, in our view, be reflected in any equity portfolio."
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