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Jason Britton: Longitude for long term

Much of the recent media coverage on markets has been focused around whether they will continue to go north or turn south, revisiting old lows.

Many investment managers and “experts” will give you their very firm view on the subject but we will simply say that we do not have such certainty as to the market’s future latitude (a measure of north and south). We can see many positives for the market to continue the run, not least the number of cash-heavy bears who are regretting not investing before now and who are desperate to see a correction so they can re-enter the market.

But the truth is that markets (over the short term) are very unpredictable. Instead, we would rather focus on what we do know about the future, and that is its longitude (a measure of east and west) will become higher than ever before, meaning a greater interest in the East.

The Western economies face many difficulties over the next decade. Government borrowings are too high, consumers have very weak balance sheets and spending cuts are imminent. The focus of the next UK election is likely to be the competition between the parties as to who can promise the biggest cuts if they reach power.

By comparison, the Eastern economies, also referred to as the emerging markets, have never enjoyed such good conditions. Not only do they have current account surpluses but also strong demographic trends, which, due to the historic birth rates, we can predict a lot more accurately than we can markets. Moreover measures of financial stress show them to be in better shape than ever before.

We feel that this this is going to move trade and wealth in one direction. Even if emerging market economies “only” grow by 5 per cent a year, they will still potentially double in size about every 14 years compared with the 70 years it may take Western economies to double if they can only manage to grow by 1 per cent a year.

The conclusion we draw from this is that investors seeking long-term growth need to have sufficient exposure in their portfolios to the emerging markets, especially as they already account for over a third of world GDP and that, as explained above, that proportion will grow substantially.

Whereas many “traditional” portfolios have between 2 per cent and 5 per cent exposed to emerging markets, the T Bailey growth fund has a starting position of 17.5 per cent, although this is a long-term stance and therefore can alter according to short-term market views to cope with the swings that we witness from time to time.

Few things in investment are predictable but one thing of which we are confident is that emerging markets in the long term will continue to grow in their importance and their share of world trade. It is more important than ever to ensure you have enough longitude in your investments.

Jason Britton is chief investment officer and fund manager at T Bailey

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