A wish for more inclusive prosperity as we move forward

In the spirit of the holidays, let’s put aside the overwhelming barrage of negative short-term economic and geopolitical news we’ve been faced with recently – which is often one of the most challenging aspects of long term investing – and instead, focus on a long term positive investment trend as we look towards 2015.

In the years ahead, many developing nations will continue to experience subtle shifts in the composition of their labour force, population, and economies. When a country first becomes industrialized, it grows very rapidly by importing foreign technology and employing both capital as well as plentiful, inexpensive, unskilled labour. This abundant supply of labour is put to work, and after a while, wages invariably begin to rise. This makes inexpensive labour less profitable over time, and forces companies to come up with their own technology to keep growing. This shift is known as the Lewis Turning Point, named after Nobel-Prize winner Sir Arthur Lewis.

As an example, with a nearly 1.4 billion population, China is known as a labour-abundant country. Arguably, the transition of its once inexpensive and seemingly unlimited labour supply from the agricultural sector (with low productivity) to the industrial sector (with high productivity) has strongly contributed to the rapid economic growth of its export-oriented industrialization. However, China now has to deal with a shrinking supply of young, unskilled labour. China has indeed experienced an explosive growth in higher education enrolment in the past ten years which should bode well for the high-end manufacturing, information technology-related, healthcare and financial sectors, as well as domestic consumption.

True, labour-intensive industries can be transferred to other countries with cheap labour (as is currently the case with Vietnam and India), but in turn, these other countries will also eventually reach their own Lewis Turning Point until countries with abundant and inexpensive labour no longer exist. Whether China has already attained the Lewis Turning Point, or whether it is still at least ten years away from reaching this milestone as some recent academic studies have suggested, is still arbitrary and debatable. What is less debatable is the presence of increasingly inclusive prosperity in many developing nations in recent past.

An example of our participation in these long-term secular trends is our investment in Lumax International, a company we hold in our small cap global equity portfolio. Lumax provides automation solutions to its predominantly Chinese client-base, allowing companies to operate their manufacturing facilities more efficiently and with less unskilled workers than would otherwise be the case. The company was founded by a few Taiwan-based university students in 1975 and now employs more than 400 employees. As the cost of labour is increasing in China and elsewhere, manufacturing operations are more and more turning to the automation of their facilities to increase productivity, which benefits companies such as Lumax.

We are constantly on the lookout for these types of companies. During the course of 2014, our team of research analysts and portfolio managers have travelled to 21 countries and conducted over 800 meetings with company managements both domestically and abroad, interviewing companies we either currently own or are contemplating as potential buys for our various portfolios.

This is essentially our role in its simplest form: we allocate capital to those companies that have the strongest ability to create wealth over time for our clients.

And in the spirit of prosperity, we would like to wish you all a happy and fortunate new year.