Long-term investors should look to population forecasts to drive their decisions, Artemis Investment Management’s Simon Edelsten has said.

Challenges lie ahead for emerging markets, now that poorer nations are set to find themselves again competing with advanced economies for manufacturing work, he warned.

Evidence points to a declining “demographic dividend” for foreign direct investors in emerging economies, particularly in South-east Asia and North Africa, as more companies start to opt for automated plants in advanced markets, instead of cheap labour, Edelsten said in a keynote address to the 2017 Conexus Financial Equities Summit.

Canon’s recent decision to move its camera plant from Thailand to a fully automated site in Japan was based on need for higher quality, rather than lower production costs, he said.

Nike’s move to establish an automated rubber shoe plant in the US to manage supply for rapidly changing consumer tastes also would be a blow to clothing and textile manufacturing nations such as Bangladesh.

“If your driving force isn’t just labour arbitrage, if your driving force is [moving to] a fully automated camera plant from a partly automated plant, to produce a better product, then that does start to cast some doubts on whether foreign direct investment, which has created high-quality jobs in emerging markets, will be quite such a big direct driver in the future as it has been in the past,” Edelsten told the summit. “The emerging market demographic dividend, which has been so strong in the past, might just be starting to wane. China will do fine, because it can automate, but others may struggle with the challenges.”

The London-based equity manager predicted the trend would have big implications for future investment decisions.

A predictable picture

He detailed how Artemis uses cashflow-based valuations and focuses on growth stocks in technology, healthcare, tourism and those exposed to emerging markets in the right sectors. Stocks exposed to this trend, such as little-known second-tier Japanese automated warehouse firm Daifuku, are in Artemis’s portfolio.

Edelsten said the global economic outlook painted a predictable picture for long-term investment and higher equity returns.

By 2100, the United Nations’ forecasts for world population are 11 billion, with almost one-third of China’s population aged over 65. Americans will be young and growing in number and Europeans will be ageing in a population smaller than today’s 700 million, he said.

This would lead to China’s tax base rising to pay for the social costs of its ageing population, alongside strong growth in savings companies such as China Life.

Rising wages for Chinese workers meant investing in manufacturers in the giant economy was “less sensible”, Edelsten said.

“Our investment is in the savings companies…China Life [Insurance Company] has a million sales people. They will help sort out the demographic issue there.”

In contrast, the world’s second most populous nation, India, which has a “complicated and sclerotic economy” has emerging market multiples that are too high and provide patchy investment opportunities, he said.

Looking ahead, Edelsten said tourism was still a strong sector, growing by 2 per cent to 5 per cent for decades in most countries, particularly in Asia. Also on his radar were internet service businesses in emerging markets, automation, and healthcare companies that could service a growing ageing population at a lower margin.

“Fashionable” headline equities in bull markets, such as Amazon, Netflix, Tesla, Facebook and Apple, are not as attractive, he said, when compared with reasonably valued companies in out-of-favour sectors, such as US banks, he said.

Edelsten noted, however, that even when investors find a “good demographic theme and a stock that will benefit from it” the task for active portfolio managers is to pay a good price for it.

Conexus Financial is the publisher of Investment Magazine, top1000funds, and Professional Planner. For details on upcoming events visit conexusfinancial.com.au/events.

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