The Magic Band

As a model for an innovative, prosperous life, consider Mark Mobius. The 86-year-old investor made his fortune by investing in emerging market stocks. This was not an original idea, but Mobius took it mainstream. He invented a way to access emerging markets and made their stocks and bonds popular and profitable for investors worldwide.

A few years ago, I had Mobius speak on a Forbes investor cruise. “Look for countries with a median age of 25 to 30,” he said. He added, “You also want countries where legal contracts are enforced and the education system is decent and improving.” Not surprisingly, Mobius loved Southeast Asia.

Over the last 30 years, trillions in capital has embraced the Mobius model. But with investment success, comes loss of edge—e.g., too much capital chasing the same vision. Can today’s emerging market investors find less-crowded pockets of outperformance?

Yes, say Nicholas Nash and Oliver Rippel of Singapore-based private equity firm Asia Partners. Nash and Rippel start with Mobius demographics, then add their own twists. Nash explained in early February, “Higher affluent countries have slower population growth rates. Look at Japan, one of the richest countries in the world. We joke that China has the one-child policy and Japan has the one-bedroom policy because it’s so expensive to buy an apartment in Tokyo. Yet what’s so interesting about the data is that India, which is about 15 or 20 years behind Southeast Asia in affluence terms, actually has a lower rate of population growth than Southeast Asia. In fact, India’s 15- to 35-year-olds are peaking not in the 2030s like Indonesia; not in the 2050s like the Philippines; India is peaking in three years.

“That is staggering. India actually is prematurely aging, though not as aggressively as China. China peaked in 1998. But if you think about who’s going to pull Asia forward demographically, it’s clearly the Philippines and Indonesia,” says Nash.

The 1998 peak in China’s 15- to 35-year-old population foreshadowed China’s lackluster returns in the 2000-2020 stock market. It may seem odd that China’s stocks underperformed broad market indices during two decades of robust GDP growth. But in the logic of investment, those two decades were already baked into the equities cake. Stocks look ahead. Good ideas get bid up early. During the 1980s and 1990s, stocks soared inside of China’s 15- to 35-year-old age band. Chinese stocks did less well as China grew bigger and older.

Does China’s aging example apply to “prematurely aging” India? Will it doom India to poor returns in the future? Not necessarily. Nash cites another magic band—GDP size—as possibly more important. Says Nash: “You want to invest in countries where the GDP [per capita] is in the $4,000 to $8,000 band. This is actually a piece of good news for India.”

Why is $4,000 to $8,000 the magic band for investment?

Nash says that’s the band where survival income ticks up into discretionary income. “Our data shows when a country gets into that $4,000 to $8,000 band, discretionary income rises meaningfully. That’s a great proxy for people who are now able to afford the better things in life. They go from unbranded goods to branded goods. They start investing in all sources of other consumption that in turn fuels growth of many consumer companies.”

Nash says the single biggest fallacy of the past decade of cheap money and blue sky expectations was that venture capital grows companies. Wrong, says Nash. Customers grow companies. “People always forget that. It’s an incredibly important truism. That’s why when countries enter the $4,000-plus band, their consumers spend, their companies grow, and investments in those companies take off. It’s almost as simple as that, yet that message is often lost.

“When India hits the $4,000-plus zone,” says Nash, “a new generation of internet companies will likely be the biggest beneficiaries. They’ll be a very big deal. India’s golden decade will be the 2030s. No doubt about it.” That’s likely to be followed by golden decades for Indonesia and the Philippines.