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The power of paradigm shifts

Nick Grace
Portfolio manager
Based in:
London office
Investment experience:

NICK GRACE: We did a lot of work back in 2001 and 2002 looking at the emergence of China compared to Japan and Germany post World War II and Korea and Taiwan as they industrialized in the 1970s. We basically looked at aluminum and copper consumption versus GDP per capita. What we noticed is exactly what the academic literature suggests: that you see an S-curve phenomenon that, as you go from an agrarian economy on the way to a service economy, you pass through an industrial phase which is very, very metal-intensive. So you’re building hospitals, bridges, roads, airports, etc. And the argument was that if China followed the same S-curve pattern as these other countries, we would see an extended period of commodity demand, or strong commodity demand. We didn’t foresee just how strong that demand would be, but the S-curve work really was very helpful.

I’m applying the same type of framework to other industries, because the same concepts work just as well — whether it’s telecommunications, insurance products, health care, e-commerce, etc. As a result, I’ve shifted my emphasis away from the commodity side more toward some of these other areas that I think will benefit. So I have both in EuroPacific [Growth Fund]® and in New World Fund® large exposure to areas of the consumer in China and in India — and to a lesser degree in Russia — that I think will benefit tremendously from this S-curve. One of them is e-commerce. If you look at where China is vis-à-vis more developed markets like the U.S., there’s a real argument to believe that we’re low on the S-curve or on the vertical part of the S-curve there. That could be a very productive area of investment over the next few years.

Same for health care. The Chinese have a very poor state health care system, and so private companies are stepping into the void and offering all sorts of services. That’s a real area of growth and interest to me.

So this S-curve work really is applicable across a whole range of activities.

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