In the world of investment, there are various strategies and criteria we can use to select the assets in which we wish to invest our money. In the equity market (although we could also apply this partially to fixed income and, to a lesser extent, to other types of assets such as commodities), we essentially have three general criteria:
- Analysis of companies’ key financial data: examination of balance sheets, sales figures, profits, corporate governance, etc. All of this covers past, present and future forecasts.
- Technical analysis: Market psychology, which involves interpreting the charts that reflect constantly changing share prices.
- Analysis of macroeconomic trends: A useful complement to the first criterion.
Speaking of the criteria he is looking for Value, one of the universal truths of investing is that if we invest in assets whose intrinsic value is objectively greater than their price, in the long term we will not only protect our wealth but also outperform the benchmark indices, which tend to represent the average of both good and bad investments. As most of you will know, these are usually referred to as investment strategies Value. However, there are other investment criteria which, whilst not offering quite the same protection against losses, also help to outperform average returns in the medium and long term. Among these other investment criteria are those commonly referred to as ‘style’ Growth, which focus on the future growth potential of businesses rather than on their current intrinsic value. They therefore have a somewhat less tangible – and consequently more uncertain, or less conservative – element. At the extremes of these two strategies lie the criteria Deep Value y Aggressive Growth, and of course, in between, the whole range of greys, such as the GARP (Growth at a Reasonable Price). Logically, the closer we get to the Deep Value approach, the lower the risk of incurring medium- to long-term or permanent losses, and vice versa.
In the opinion of the technical analysis, the best we can say is that, in the short term, it tends to correctly interpret market sentiment, with a clear element of self-fulfilling prophecy. But reality is very stubborn, and the greatest fortunes amassed by the world’s top investors have never been built up in the long term by following these technical criteria, but rather by fundamental ones (and take it from someone who, at the tender age of 23, started out in the markets as a broker, carrying out technical analysis on all kinds of commodities during the golden age of derivatives in Sherman McCoy). Therefore, adhering strictly to this criterion neither guarantees that permanent losses will be avoided, nor does it ensure that we will outperform the benchmark indices in the medium and long term. In fact, it is a far cry from valuing the underlying businesses behind the shares, which leads to absurdities such as recommendations to sell companies at ridiculously low prices and buy them at exorbitant prices. On the «positive» side is the minimal effort required to analyse a simple chart, as opposed to the complex art of analysing a company’s present and future value…
As for the third criterion, which is based on wind patterns macroeconomic Wherever you go, it can be a useful addition to bear in mind, alongside the comprehensive and essential fundamental analysis. Because in the ‘New Normal’ in which we now find ourselves, macroeconomics offers us a unique opportunity: The greatest growth of the middle class ever witnessed by humankind. And no one should fail to realise that a massive and growing middle class is the ideal breeding ground for companies to grow, and with them their share prices. We are currently witnessing the full-blown decline of developed economies, whilst the emerging world is in full bloom. These are economies growing steadily and strongly, with a middle class that continues to expand. And all this – take note – with levels of debt reminiscent of the West almost half a century ago.
Below, you’ll see in this chart – which I’ve borrowed from Albert Parés, how the middle class is already growing rapidly today, and will continue to do so over the next 15 years.
As you can see on the map, the massive growth of the middle class is taking place primarily in Asia. This leads us to a logical and straightforward conclusion: Today and in the coming years, the best corporate returns will be found in companies based in, and/or with a majority of their interests in, regions stretching from Turkey to Brazil, including Russia, the Middle East, India, Malaysia, Thailand, Vietnam, China, the Philippines, South Korea, Chile, etc.
If we consider this demographic and economic boom as yet another macroeconomic factor, we conclude that a strategy focused on value and/or growth at reasonable prices (GARP) in the region marked on the map as «Asia-Pacific» will prove the most successful in the coming years.
Unfortunately for Europeans, the centre of today’s world lies a long way from us. And as the much-admired Paramés, The distance between the fund manager (or investment manager) and the companies in which they invest is inversely proportional to the alpha they will achieve. In other words, the further afield we seek to invest, the less thorough our understanding of the businesses in which we invest is likely to be, and therefore the lower our long-term returns will be. But to avoid this ‘distance handicap’, we have a perfect solution, albeit one available only to the best-informed investors. And that is none other than investing through funds managed locally in those countries, by star fund managers who live there and who have demonstrated their ability to find value in their investments over many years.
But be warned, there’s another drawback: most of the best investment funds in those markets aren’t authorised for sale in Spain. Don’t forget that, as we said in «Investment funds and the devil take them all«Of all the funds in the world, only 10% are registered in Spain for distribution. And when it comes to the best funds in those emerging markets – the «top performers» in those countries – Spain, unfortunately, lags far behind. And the size of the Spanish investor base does not justify the effort required to register in our country (just as, for example, Bestinver Stock Market o ElCano Sicav are not registered in Indonesia or Hong Kong so that they can be traded there). It is therefore not enough simply to know how to select the best fund managers in the emerging markets; one must also have investment vehicles which allow us to access them whilst deferring taxation, just as we would with any transferable fund at our local bank.
In conclusion, given the phenomenal growth the middle class is experiencing in Asia, this phenomenon has already become (and will continue to be over the next decade) an essential macroeconomic factor that we must take into account in our ongoing pursuit of corporate value. The prevailing advice today is to invest in the best fund managers employing Value/GARP strategies, right where the miracle of capitalism is unfolding: in the emerging markets. We are witnessing the rapid growth of an emerging middle class that will soon account for 70% of the world’s population.
As investors, we cannot afford to miss out on this, and we would be well advised to seek expert advice to help us select the best local funds, as well as a suitable legal and tax structure in which to place these investments. Global growth and the growth of our wealth lie far away, yet are within reach of those who are best advised.
P.S. For those of you who are interested in getting started with value investing, I recommend this slim, inexpensive little book by Álvaro Vargas Llosa (son of the renowned writer Mario). It’s not that we agree with it entirely, but we do find it very informative and accessible for those new to value investing.