Window on the world
James Anderson, CIO at Baillie Gifford, talks to editor Heather Farmbrough about the rise of global economies
How does the collapse of the American sub-prime mortgage market, which we have mentioned previously, fit into your long-term and global perspective?
I think concern about sub-prime mortgages and speculation in the Western financial system has arisen because Asian countries, particularly China, want to use their own money to invest in their own assets and resources, rather than lending it to us in the West for very low interest rates. One stock market that hasn't really been affected is the Chinese stock market. I think this signals another stage in the process of change of the world's economic leadership.
What do you think is going to change?
I feel pretty sure, particularly having been there again this summer, that the Chinese model of economic leadership is likely to be different. I don't think that the Chinese will ever believe that capitalism should work without interference from the state or that globalisation equals free markets, which in turn equals American-style capitalism.
And what do you think that will mean to us in more developed countries?
I am not sure how long American, British, European and Japanese companies will be capable of maintaining their competitive advantage. The pace at which developing countries' economies are moving up the learning scale is much, much more rapid than many people had expected.
It is noticeable how many overseas students there are here - particularly from China. But what happens when the students head back home?
I think that they will learn very quickly everything that we have got to offer, and this is going to be positive for all. One of the most intriguing things about China, India and Russia is their tremendous intellectual heritage. This is the first time that societies which had once dominated the world in a philosophical, as well as a political, sense are becoming the dominant powers again. It is another reason why I believe that a different thinking from our prevailing Anglo-American business practice will emerge. A society that has, for the last 3,000 years, been evaluating how it runs the world is likely to think very differently from America, which was a very young country when it became economically powerful.
What do you think this will mean in practical terms for investors?
There are two issues. The first is that state involvement can suppress or stymie the development of young new companies, and so there may be fewer. The second is in the way that we take a look at companies' competitive advantage. Here, we have been concerned recently about Vodafone because mobile telecommunication is basically a commodity product and so it is necessary to build up a brand so as to compete with other suppliers, and this reduces investors' returns. China Mobile is different: the firm is state-backed and it is essential nationally to continue with developing and funding networks and telecommunications. I suspect that companies like China Mobile may have a long-lasting competitive advantage and so, in theory, may prove to be a better investment. The link between profitable stock markets and economic development may be a little more tangled than we think; we might see that there is less short-term economic development because the state may be imposing its own values, however the companies that we invest in may be stronger for the lack of development.
You have mentioned before that the stock market which has consistently produced the best returns is Sweden, yet with so many companies being family owned, and their often socialist government, it is very different from our own model of capitalism.
I think that is right - the best country in stock market returns may not be the best in economic terms. There is a consensus in Sweden about how things should be done, whereas in emerging markets there is often a tension between the objectives of national and local authorities - which is not necessarily a bad thing. In emerging markets, from China to Russia to Brazil, however, there are similar persistent patterns of family backing and ownership.
Education is also a big factor, surely?
Looking at the significant numbers of science graduates coming out of Chinese universities and the almost legendary skills of Indian software engineers, I think so. America has been the leader in business education, not so much because it had better academics or anything, but because the links between academia, the economic system and the stock market system are so close. I think that the next capitalistic moment of importance will come when there is a Chinese or Brazilian Google or Genentech (the biotechnology company).
When do you expect to see the shift in economic leadership that we have been talking about? Could it be 10 years?
I think that 10 years is probably too long. Countries are beginning to move beyond the resource stage to the next, which is a developing of the domestic infrastructure as well as financial liberalisation, consumption and housing. I would much rather bet on the first mortgage-borrower in China or India than I would on the third or fourth in Britain or America. Chinese companies are making considerable progress in alternative energy, particularly in terms of solar power, which really rather contradicts the notion that the Chinese do not care about what they are doing to the environment. In fact, I think that they are extraordinarily aware, which is yet another consequence, perhaps, of China being one of the world's very old societies and not thinking about just doing something for the next 10 years or so.
But for the readers of this magazine, what does all that really mean?
I think that it means let's continue with the approach we have. An investor sitting in Dundee 100 years ago might have realised that they would be better off investing in America. I think that this is similar. As the recent IMF [International Monetary Fund] projections show - though you don't need to be the IMF to see this - China will contribute more to world growth during this year than America. We can all see the growth of the emerging markets in our everyday lives. For example, the next time you telephone your bank, the chances are that that you will be speaking to somebody in Bengal, rather than somebody in Glasgow. It's just that the investment world, which is obsessed with market capitalisation and splitting the world up into neat chunks, is not so aware of it.
Investment markets, including the currency exchange rates, can go down as well as up and market conditions can change rapidly. The value of your investment and any income from it can fall as well as rise and you may not get back the amount that was invested. The views which are expressed in this article should not be taken as statements of fact and no reliance should be placed on these when making decisions about investment.
Back to top
