Focusing on Structural Growth Amid Macro Risks
DAVID SEMPLE: Well, in the second quarter of 2019, emerging markets performed reasonably well, but of course there was a dislocation in the middle of that where trade tensions flared up again. We see the likelihood of coming to at least an uneasy truce helping emerging markets going forward. But we're pleased to report that the kind of things that we invest in, structural growth at a reasonable price, did well in the second quarter and indeed in the first quarter. So, the underlying structural growth themes of what we do were amply rewarded. And I think the concern had been more in terms of, you know, when people think about supply chains in the future, there's a hesitation for investment. And so that's drawn down business confidence. On the other hand, given that expectations are being revised down for our global growth, principally driven by the business side of things, you see that a lot of central banks, the Fed [U.S. Federal Reserve], the PBOC [People’s Bank of China], the ECB [European Central Bank] have definitely moved onto an easier monetary stance and that's reflected throughout emerging markets as well. We're seeing a number of central banks moving to easier money.
Emphasis on Shareholder Returns
SEMPLE: Emerging markets indeed have underperformed the S&P for quite some time now and a large part of that has to do with the dollar and the strength of the dollar, which is a negative for emerging markets, particularly as translated back into dollar. But it also has to do with the increasing margins and return to shareholders that the American companies have provided. And that in many senses provides a role model for a lot of emerging markets companies going forward. Whether there'll be able to have the same kind of concentration effect, which has definitely had an impact on margins, as the U.S., remains to be seen. However, what we do see is increasing emphasis on return to shareholders. And that's generated because they have a nice problem of excess free cash flow, very high, almost record, free cash flow in emerging markets into balance sheets which are arguably under-geared. So, I think that corporate dynamic will start to really come through well in the second half of this year and going forward.
Where to Find Structural Growth
SEMPLE: There are many elements of structural growth that we like to invest in. Every investment that we potentially consider has to have structural growth. And a couple of the areas where we find that to be very relevant in emerging markets, good places to go and look for it, if you like, are education and healthcare. Education is clearly the route to success in many places. If you can afford good education, you will afford good education and it tends to be a little less price-sensitive than some other quasi consumption items. So, we've had successful investments in education in a number of countries in the world. So, for instance, we've had a long-term holding in South Africa for a company that provides principally secondary education. Because in South Africa, the outcome in terms of students and their performance in standardized tests per dollar spent is actually pretty poor.
So private education is definitely an aspirational thing for much of the middle class. And in healthcare, again, public provision of healthcare services can be substandard or limited in terms of availability. So, if you need something done, or even if it's an elective surgery, private healthcare tends to be the way to go. Oftentimes, governments can't afford to have the right kind of healthcare facilities for populations that are aging quite rapidly. So, we found that to be a very good place to invest in, whether it's from the pharmaceutical part of the healthcare business, through the distribution, into hospitals.