Holly Cook: Katie Koch of Goldman Sachs Asset Management, we're here at the APCIMS annual investment conference and you've just given a very engaging presentation on growth markets, and the BRICs and beyond in general. Now anyone who would have attended the Morningstar Conference in 2012 will know about the growth markets and you outlined those for us there. You talked a bit today about the aspiring growth markets, the next level, can you tell me about more about those?
Katie Koch: Yeah, sure. So in our last conversation together, we did focus on those eight countries that we now define as growth markets. And as a reminder those are the BRICs, Mexico, Indonesia, South Korea and Turkey, and the unifying factor across all eight of those is that they have at least a 1% share of global GDP and we've elevated them to that special ‘growth market’ status.
However, there are some countries in the world--in fact there is over 160 other non-developed countries that aren't yet growth markets, and when we look at that bucket of countries there are a few candidates in particular that we think look very attractive, and so those countries that we are focused on and that we are investing in right now include Egypt, Nigeria, Pakistan, Bangladesh, Philippines and Vietnam. You used the term ‘aspiring growth markets’ and I think that's a great phrase to apply to those countries and the reason for that is that we think that those countries and why we are focused on them and investing in them, actually have the demographics, as well as the growth conditions to propel themselves to become big and important economies and take 1% share of GDP.
And so, backing that up, everyone knows what the BRICs are, people are less familiar with what is ‘Next 11’, this concept that we have. In a very big picture term, Next 11 is the next set of interesting emerging market economies. As it applies to this question that you have, the Next 11 gives clients exposure to the four growth market after BRICs: Mexico, Indonesia, South Korea and Turkey and then the set of aspiring growth markets. We think it's a great economic concept, and we really do think it provides a very interesting investment proposal for clients as well.
Cook: So, what are some of the investment themes that these countries have in common that you're focused on?
Koch: Yeah, I would say one big one is that--and people are quite focused on this--we know that China is making that transition from being an investment- and export-led economy to more of a consumer economy and that has all sorts of interesting and important investment implications for China. But it also has a knock on effect to some of these countries that I just mentioned to you and that knock on effect is the following. As wages go up in China and it transitions to a more consumer-led economy, it is not as competitive for them to export, especially in the lower value part of the chain.
Now, countries like Bangladesh and Vietnam are able to take some of that market share away from China and that's been very positive for their growth rates, and so from a macro perspective that's the trend that we are focused on in some of those aspiring growth markets.
The other thing that I would say that is consistent across all of these countries is opportunity and infrastructure, whether it's water sanitation or power and then, of course, also opportunity in the consumer. And we see that consumer opportunity in those countries as well as really all countries in the growth and emerging markets space. And to quantify that for you, we think across these BRIC and Next 11 countries, there will be 1.6 plus billion people entering the middle class across those countries.
So, dramatic impact on the fortunes of both developed, as well as growth and emerging market companies, and really presents a very important investing prospect.
Cook: I think one of the themes that I thought was particularly interesting that you talked--about a theme within a theme--is the womenomics or gendernomics, and I'm going to be quite unfair to you and ask you to try to summarise this huge topic in answer to one question. But can you explain a little bit more to us about what it is within that consumer story, the middle-class consumer story about education of women and looking at this area of the demographics that plays a really key role in company investment and moral standpoint.
Koch: Yeah, so women very important to the story of growth in emerging markets broadly. I would split it down to two areas; the macro as well as the micro. Macro is, simply put, women make up half the demographics in the world, right; we're half the population. And when you look at what drives the country's growth, right, it's a combination of demographics, so lots of people and they’re young, and good growth conditions. And as I said before, that's one of the reasons we're optimistic about these countries. Now when you think about growth conditions, there's lots of things that you can measure. One important one is the quality of human capital, which we think about as life expectancy and education, and so we know that when you invest in those things, particularly for a woman, it's a good thing for the economy. If you look at it, take a step back and look at what investing in women can do from a macro perspective, if you raise levels of education, which raises female participation in the labour force, which raises use of technology across these countries, we actually estimate that you can raise GDP per capita in all these countries by an average of 11% or 12%, so very, very big macro impact by focusing on investing in women.
Then I said there's also a micro impact, and the micro impact is understanding that as we invest in women, certain implications will happen. For example, they have increased bargaining power and the micro impact of that is that we have to think about the impact of that on some of the companies that we invest in. And so when you look at the consumer space, if you're invested in a country where women are an increasing bargaining power, you want to have exposure to companies that are linked to that, and what women are most likely to spend money on is things like high-protein diets, clothing, for example, and so in our portfolios we have exposure to some of those companies where a central part of the investing thesis is actually about the increased bargaining power of woman. So very important implication for women, both macro and micro in this part of the world.
Cook: So it's very interesting to see how your search really sort of funnels down into quite specific elements.
Koch: Yeah.
Cook: And I think just as a final question, I think I am right in saying that compared to how people are currently invested in terms of asset allocation, a lot of people have exposure to emerging markets, but it's often quite a small part of their portfolio. You'd be firm believers in people needing to make a shift to expand that allocation towards emerging markets, is that right?
Koch: Yeah, absolutely. We think that this part of the world is very under-represented in client portfolios, both in the public equity markets as well as in the debt markets, and so one of the great aspects of my job is that I get to go meet our clients all over the world and consistently their allocation, I would say, is in the mid-single digits on both the debt as well as the equity side, retail as well as institutional clients, and so we're really partnering with our clients all over the world to actually try and move them to much higher allocations to growth and emerging markets, because we think you get a good combination of very strong and attractive growth prospects, and particularly right now, at attractive valuations. And so we think it should be raised to be a much more significant part of client portfolios.
Cook: Katie Koch, thank you very much. Great to hear from you again.
Koch: Thank you.
