Here is a link to the full report and here is a section from it:
You were right about Rajiv Jain... being "wicked smart." He held a conference call last week and as a new investor to his fund I listened in. I was taken by the profoundness of an answer he gave to the question of, “Do you think the emerging markets are a buy with them selling at such a discounted PE to the developed markets?” His answer was as follows:
“First let me say that yes, I like the emerging markets, but not for the reason you gave. In fact, I disagree that the emerging markets sell at a large discounted PE vs. the developed markets. Yes the PE is lower, but it’s not because they are unduly cheap. EM sells at a discounted PE because of the composition of the EM. The industries that comprise the emerging markets are primarily, autos, oils, steel, lumber, basically old heavy industry and natural resources. Well, auto companies sell for less than 10 times earnings in the U.S. and sell for less than 10 times earnings in the EM. Oil companies sell for a low PE in the U.S. and sell for a low PE in the EM. The industries in most emerging countries are those that make money from mining 'things' and making 'things.' Whereas the developed countries, primarily the U.S., are comprised of companies that make money from innovation and invention. You can buy 'things' from anywhere but you can’t buy innovation from anywhere. So you pay a higher PE for a company that is nimble and innovative versus a company that produces the same thing year in and year out, and makes a product you can buy anywhere.”
In my 38 years in this business, I have never heard anyone make that distinction between the U.S. and emerging markets. It also sounds like he is a believer in your 'intangible asset' theory, although he never used that term. The way I personally explain intangible assets to my clients and friends is, "You pay more for what somebody knows than for what somebody owns."
Since the dawn of the first industrial revolution 250 years ago there has been a clear correlation between the energy intensity of economies and economic growth. That is certainly still true in many emerging markets. However, when we look at highly developed economies like the USA and parts of Europe the energy intensity of the economy is declining, but data intensity is rising.
Rather than talk about markets geographically it may now be more important to talk about how data intensive the economy is. Of course, that also correlates strongly with the strength of the consumer and services sectors. If that delineation is in fact correct, then we can anticipate that data intensity will be the primary engine for economic expansion going forward. The problem is current methods for measuring economic activity like GDP and manufacturing data are not readily transferrable to software, analytics and deep learning.
The world is still getting its head around this transition and there is absolutely no doubt energy is going to remain a vital part of the economic equation for decades to come. However, this is a secular change and it represents the foundation of the long-term bullish hypothesis.
The big question outstanding in how the world adapts to this transition will focus on debt. Technology is inherently deflationary because its entire focus is on figuring out how to do more with less. That leads to a concentration of the as the benefits of developing technology are concentrated in a small number of hands. Meanwhile the consumers of services see they get more for less but over time have seen the call on their resources increase from multiple sources. That is leading the charge for higher wages, better social programs and a sharing of the wealth. The answer to these questions is going to require a revolution of sorts that swings the pendulum back in favour of consumers for a while. That is what the rise of populism is telling us.Back to top