Mental Adjustment

June 2018
James Anderson
JOINT MANAGER, SCOTTISH MORTGAGE INVESTMENT TRUST

It’s normal in life and still more in investment to be deeply suspicious of optimism. That’s even more so as regards China. The next superpower is rarely popular. A century ago Scottish Mortgage was suspicious about America. Now most American investors are both ignorant and scathing in their attitude to China (usually the more ignorant then the more scathing). Even those less consumed by negativity prefer to hide Chinese exposure within a closely watched and tightly constrained ‘Emerging Markets’ allocation. To us this appears problematic relative to the size and uniqueness of the opportunity.

For the first time in my investing life Silicon Valley is not the cutting edge of the global narrative.

We do not believe that China can be easily dismissed. Its debt levels seem to us to be more than balanced by assets, savings and the sovereign ability to print money. The demographic challenges seem to underplay productivity gains driven by the remarkable and continuing investment in education. In the next decade China will likely generate four to five times the number of science and technology graduates each year than the US. China is on course to overtake the US in expenditure on science research and development. It may have done so already having increased by 18% per annum since 2000. I’d be still more upbeat about the prospects of China confronting its environmental demons. Government and people know that change is needed. As the founder of our unquoted electric vehicle manufacturer, NIO, put it “it’s easier to work with the grain of society than against it.”  In December 2017 186,000 electric vehicles were sold in China. That’s 6% of registrations or more than total UK monthly sales. China installed 1GW of solar power per week in 2017. This is 60% more than predicted and is capable of replacing two coal fired plants per week.

In the next decade China will likely generate four to five times the number of science and technology graduates each year than the US.

For the first time in my investing life Silicon Valley is not the cutting edge of the global narrative. It’s not possible to confine the excitement of China to one city or valley but as a symbol Hangzhou will do well. It was once described as “without a doubt the finest and most splendid city in the world.” That was by the marvelling Marco Polo. Perhaps it’s just restoration of the rightful economic order that Hangzhou is now the home of Alibaba.


Gross domestic spending on R&D - in billions of current PPP dollars, 2000-2015

Gross domestic spending on R&D - in billions of current PPP dollars, 2000-2015

The views expressed in this article are those of the author. Its express purpose is to highlight areas of intellectual thought and debate which inform the investment philosophy that underpins Scottish Mortgage, in the hope that they may be of wider interest. The author(s) therefore make(s) no suggestion that this article constitutes independent investment research and it is not subject to the protections afforded to such.

Further, it is not intended to be considered as advice or a recommendation to buy, sell or hold any particular investment. Those considering investing in any of the areas highlighted in the article should undertake their own research, seek advice if unsure, and be aware that the value of any investment and any related income, can fall as well as rise, meaning that investors may not get back the amount invested. For those looking for information on Scottish Mortgage specifically, please visit www.scottishmortgageit.com