He emphasizes that local overcapacity brought about by cheap capital can now become a global issue very quickly because of globalisation and technological innovation. The ‘abundance’ theme therefore suggests that this development has created rigorous competition for businesses due to the proximity of the client to the producer having become less important.
Mind the gaps
Conversely, some services such as consultancy are still tied to a specific country through intellectual property. This gets us to Shant’s second theme: mind the gaps. The ‘mind the gaps’ theme analyses the difference in speeds in which different parts of the world economy are growing, resulting in widening inequality and sharply diverging valuations. While the parts of the world that wanted to be the workshop of the world are beginning to suffer from over-abundance, areas heavy on intellectual property such as Silicon Valley are thriving, argues the fund manager.
Implications for EM
The theme suggests a cautious approach to companies with poor governance and under-investment in technology, which explains Rajesh’s conservative view on a number of emerging market opportunities. “Emerging markets have been underperforming developed markets for three years now, so we are already a long way down recalibrating the risks there. But there might still be another round [of devaluation],” he says.
However, Shant is seeing some great long-term opportunities there over the next year or so, valuation-wise. But it’s still too early for him to give it go. “We have very little exposure there now, but it is one of few parts of the world where valuations now look like a once in a decade opportunity.”