Like everyone else, we are appalled by Russia’s invasion of Ukraine. After a difficult, and indeed ongoing, battle against a global pandemic, this was a tragic way to welcome what we hoped would have been a year of healing for the world. Arisaig’s role, as an investor, is to understand what the implications of the invasion on the markets we invest in. In this piece, we briefly discuss our view, based on 25 years of investing in emerging markets. We touch on two main categories of second order impacts: 1) inflation; and 2) a renewed flaring of tensions between China and the US.
In terms of inflation, we expect the need for more expensive oil imports will slightly dampen economic growth in two key emerging markets, namely India and China, over the coming months. However, India’s strong foreign exchange reserves at more than 10 months of imports (twice as much as compared to the ‘taper tantrum’ period of 2012-14) and momentum coming out of the third COVID wave give us confidence that this country will be able to maintain its status as the world’s fastest growing major economy. Brazil, another key market, should be better placed given its role as a commodity exporter, although there may be some uncertainty related to elections later this year.
Moving on to the geopolitical fallout of events in Ukraine, the greatest risk to emerging markets would be a further worsening of relations between China and the West as a result of differing postures towards Russia. We do not place great credence behind the idea that Russia’s invasion of Ukraine will somehow embolden the Chinese government to invade Taiwan. This is not to say this will never happen, but we do not think this conflict has any influence on that timeline, nor does it make such a difficult military operation any more likely to be viable. We think that the bigger risk is that if China is seen by the US to be assisting Russia too much in the Ukraine conflict (diplomatically, or through military or economic ‘lifelines’) then it too could be subject to sanctions. This risk to some extent dovetails with pre-existing tensions currently flaring again around the treatment of Chinese ADRs. Whatever form it takes, the implications of a US sanctions escalation on China would be bleak for all global markets, not just China, although arguably high-growth, domestic demand-driven economies such as India would be comparatively well placed.
We think that this doomsday scenario is unlikely, as we believe that China does still want to be part of the international order, and that it realises the crucial importance of maintaining at least civil relations with Western countries when it comes to dealing with matters of shared interest (climate change, global health, trade etc.). Meanwhile, Western countries will be cognisant that the costs of excluding China from the international system would be far, far greater than is the case with Russia.
During times such as this, we recognise the importance of remaining disciplined and not deviating from our process and philosophy. Our Investment Philosophy is based around the core belief that the practice of ‘Purposeful Growth’ delivers superior operating performance for our holdings and supports their right to grow forever. We believe that the long-duration compound earnings growth that comes as a result is the primary driver of superior shareholder returns. We continue to be excited about the growth opportunity in emerging markets, these countries collectively encompassing 80% of the world’s population as well as being the main engine of global economic growth over the coming decades.
As was the case during the global financial crisis of 2008/09 and the initial stages of the covid-19 pandemic 2020, we see periods of market panic – where share prices of great companies become divorced from their fundamentals – as times of opportunity. Over the long-term, we believe that fundamentals drive returns, and with that in mind we will remain patient and are as confident as ever about the health of Purposeful Growth businesses.
