Ben Yearsley: Wealth of emerging world can offset West's decline
Saturday 29 October 2011
I would like to let you into a little secret this week, although it probably won't surprise you: some fund managers aren't that exciting. In fact some are rather dull – not necessarily a bad quality for someone you are entrusting your money to of course. Yet there are others so passionate about their subject that it clearly shows they love their job. Anthony Eaton, manager of the J M Finn Global Opportunities fund, definitely falls into the latter camp.
So what makes Mr Eaton so enthusiastic? Quite simply, it is the rapid pace and colossal effects of globalisation, and in particular the industrialisation and urbanisation of developing countries.
China is the obvious example. The number of cities in China with a population of more than 1 million people has grown from 150 a few years ago to 173 now. Quite mind-boggling when you consider the US has just 9 and Europe 36.
As with any great trend there are investment opportunities. Not only does the physical process of building cities and infrastructure create wealth on a local basis, but the demands for commodities and energy stimulates a myriad of other industries. Plus as cities get bigger and wealthier (and as people move from a subsistent standard of living to an urban one) they require more of everything from consumer goods to processed food to luxury items.
Whilst the growth in usage of things we take for granted such as electricity, oil and food is slowing down in the developed world, it is still rapidly increasing in emerging nations. Similarly, the demand for all manner of goods is taking off due to increasing wealth and wages in emerging nations. Anthony Eaton believes the vast populations and burgeoning wealth in these countries is a far more important consideration than any slowdown in the West, and increasingly these populations are competing for the same resources and goods. He points out this is the reason why copper sells for 3.5 times the cost of production, why good bordeaux fetches $10,000 a bottle in Asia, and why you wait seven months for a new Volkswagen Golf.
This clearly creates numerous investment opportunities across a broad spectrum of companies. Mr Eaton likes buying into those exposed to growth trends early in their life cycle and who have pricing power due to demand outstripping supply. As part of his analysis he looks to identify "bottlenecks" in the global economy to see which companies have the greatest pricing power. He currently believes one bottleneck is in manufacturing (we have gone from having too few "ingredients" to having too few "machines" to mix the ingredients), a result of companies reducing their capital expenditure in the recent years of economic turmoil. The investment thesis here is simple: invest in companies making the machines.
Commodities remain an interesting strand of this fund too, and Anthony Eaton highlights some interesting developments in the wake of market falls. Following a 25 per cent decline in the copper price he notes the Chinese have started buying copper mining firms, effectively expressing the view that prices have fallen too far and represent a buying opportunity. Buying existing mines can be a shrewd strategy as new mines often yield less than existing ones, a further factor restraining supply and keeping prices buoyant.
With this fund you are buying into the emerging market theme, but often through developed market companies. For instance, there is only one Chinese company in the portfolio currently, and Anthony Eaton believes some of the greatest beneficiaries will actually be companies in the West as they have the advantage of global scale and pricing power.
The fund can be volatile, but for adventurous investors looking to harness what is perhaps the defining investment trend of the next decade I believe it is an attractive fund – and you won't find a more enthusiastic or passionate fund manager than Anthony Eaton.
Ben Yearsley is investment manager at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds included in this column, visit www.h-l.co.uk/independent
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