Saper Vedere

April 2, 2012

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Weekly Market Commentary

Tim Phillips, CEO – Phillips and Company

Since Jim O’Neill’s paper on the BRIC (Brazil, Russia, India, and China) economies in 2001, there has been a lot of emphasis on growing economic countries because of their rapid GDP growth and the potential for significant investment returns. Over the next few weeks I will be traveling around India to see for myself what the country has to offer the global economy and its investors.

When reviewing long-term expected asset class returns, the emerging markets are one of the few classes that present decent potential for opportunities over the long run. You can see how emerging markets compare to other asset classes in the table below.

asset claases and their expected returns

Drill down even further and expected rates of returns for the country of India looks just as good.

20 year market cap annualized growth rate

India has a population over 1.2 billion people making it the world’s most populous democracy and second largest country in the world (by population). India is also currently the 10th largest economy, but if GDP continues to grow at 6-7+% it could easily become the 5th largest economy in a few years. They have more than doubled their wage rates over the last 10 years and between 2010-2011 added 227 million telecom subscribers. At the same time, India has the world’s largest population living below the World Bank’s international poverty line of $1.25 per day.

I can recall several years ago when I took a similar trip to China. It was very eye opening and helped me form the basis for a long-term investment thesis. Being on the ground I was able to better understand how the Chinese people thought about business, entrepreneurship, ethics and desire. I was able to get a feel for the basic animal spirits that drive their economy forward. I believe this is something you can't get from sitting behind a desk or reading reports.

It’s like asking your local grocer or merchant how business is going. It’s only one data point, but if you ask enough merchants you start to form a picture and generate an opinion. That is exactly what I hope to achieve on this trip by talking with opinion leaders, merchants, farmers, the political class, the rich and the poor. Get a firsthand idea of what's happening.

Some of the stated reasons for investing in India are:

  • Inward consumption based on growth
  • Conservative Central Bank
  • Transparency
  • Less government stimulated growth

Some of the questions I hope to answer from my observations and conversations are as follows:

  • What are the hurdles to sustained economic growth over 7.5%GDP?
  • What is the culture of transparency when it comes to their accounting standards?
  • How much real economic class mobility exists in the country?
  • Who's investing in the economy and why? Is it naive foreign investors and the locals are just buying gold?
  • Is there a real emerging middle class that has a propensity to consume?

Leonardo da Vinci was known for a unique concept of gaining knowledge. It was based on the belief that sight was man's highest sense because it alone conveyed the facts of experience immediately, correctly, and with certainty. He called it saper vedere best translated as “to know how to see”. Perhaps we need a little more of this in our country to figure out if what we are seeing in our markets is consistent with what we know about our economy.

If you have questions or comments please let us know as we always appreciate your feedback. You can get in touch with us via Twitter, Facebook, or you can Email us directly.

Tim Phillips, CEO – Phillips & Company

Research supported by:

Adam Gulledge, Associate – Phillips & Company