On the surface, the investment world today is overwhelmed with risks, in particular rising interest rates, geopolitical conflicts, and a lingering trade war. However it is important not to confuse waves for trends. The global population is forecast to increase to 8.5 billion by 2030, technology will accelerate the pace of productivity improvement globally, and China will become the largest consumer market in the world within the next decade. These, along with many other encouraging developments, formed the foundation for a strong, secular growth trajectory for investing in Asia and Europe.

Of course, uncertainties bring stock market volatility and corrections. But as long as the positive trends remain intact, setbacks are a blessing in disguise for patient investors. For those who currently have little global exposure, an extended bottoming process provides the most ideal environment to gradually grow Asia and Europe weights to where they should be.

The stars are finally aligned for investing globally.

But to capture the opportunities to their fullest, investors are best advised to: 1) focus on Asia and Europe; and 2) embrace volatility.

Focus on Asia and Europe

While decades in the making, the strengths of China has never been more pronounced than today, when the U.S. is willing to risk a full-blown trade war in order to slow down the pace of technological advancements in China. However, evolution of human societies can’t be averted by a few politicians’ will; nor should change be demonized. The shift of global power to the U.S. a century ago has not stopped European countries from prospering, and it is wrong to believe the U.S. can’t thrive along with the ascendance of China.

Domestically, China is pushing through financial market reforms, opening up its consumer market, and deleveraging its economy. The country’s transition into a consumer driven economy is gathering pace, and domestic technology developments are rapidly catching up with that in the U.S. On a global stage, China is opening up further, promoting global trade, and strengthening economic and political relationships with countries from Africa to Europe to Latin America. Given its economic size, as China ascends, the economic engines across Asia are humming. The Indian economy is growing at a pace even faster than China, and Japan just reported the longest period of economic expansion in over 3 decades.

The strong regional outlook is further enhanced by North Korea’s decision to denuclearize and bring peace back to the Korean Peninsula.

The long-term opportunities in Asia are incredible. With over half of the global population residing in Asia, the sheer magnitude of Asian consumption is enormous. According to Morgan Stanley, China’s consumption power was about 4.5 trillion dollars as of 2016, but by 2030, up to 9 trillion dollars of new purchasing power might be emerging out of China alone, which is equivalent to half of the U.S. GDP.¹ There is no better place to take advantage of Asian consumerism by embracing Asian technology companies and consumer goods champions with domestic Asian roots.

Beyond Asia, Europe is not only a structural beneficiary of Asian consumerism boom, but also well positioned to benefit from the current trade confrontations between the U.S. and China. In the long run, the opening of the Chinese market benefits European companies as much as American ones; in the short run, while American companies are working on strategies to avoid being boycotted, European consumer brands are building trust and winning hearts in China.

The strong performances of luxury consumer companies, such as Swatch, LVMH and Pernod Ricard, are proof of Europe’s natural strengths, and it is our belief that we are still only at an early stage of a strong secular trend.

The center of gravity is shifting. For the first time in over a long time, the path of least resistance is turning away from the U.S. and pointing to Asia and Europe.

Don’t run from volatility, but embrace and profit from it

Some investors mistakenly confuse volatility with risk. Equity investors may lose money for one of two reasons: either picking the wrong stocks, or selling the right stocks at the wrong time. In both cases, what hurts the investor is not the quotational decline of prices, but the wrong process in decision making. The problem is remediable and takes two steps: 1) choose companies with management teams or portfolio managers who have independent thinking and a track record of profiting from volatility; 2) with the right managers, follow the advice of Warren Buffett; go against the herd and buy when others are selling in a panic.

Volatility will be with us as long as we choose to be an investor, but the ability to embrace and take advantage of volatility is precisely what differentiates a good investor from the rest. Warren Buffett famously said he would much rather earn a lumpy 15% over time than a smooth 12%², and that’s advice all investors should hold close to their heart.

About Benjamin Zhan

Benjamin Zhan joined Dynamic as an equity analyst in 2003 and was promoted to Portfolio Manager in 2010. He manages both Dynamic European Equity Fund and Dynamic Asia Pacific Equity Fund. He started his career in 1996 at a Chinese subsidiary of a leading European chemical conglomerate. After completion of his graduate study, he worked as a product manager with a large hi-technology equipment manufacturer based in Vancouver, and as a real estate analyst with CB Richard Ellis Ltd. His broad experience across industries and cultures formed the strong foundation for his unique global perspective and his fundamentals-based investment process.

To learn more how Benjamin invests in Europe, access the Dynamic European Equity Fund

Source:
¹ Morgan Stanley Research (February 13, 2017). Why we are bullish on China. Page 12, exhibit 13.
² http://www.berkshirehathaway.com/letters/1996.html

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Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any funds managed by 1832 Asset Management L.P. These views are not to be considered as investment advice nor should they be considered a recommendation to buy or sell. Dynamic Funds® is a registered trademark of its owner, used under license, and a division of 1832 Asset Management L.P.

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