The Supercycle: A Longer Range View of Emerging Markets

By David Bogoslaw

(Corrects Morningstar data in seventh paragraph.)

Lots of investors say they adopt a long view, usually three to five years, when it comes to a particular investment. Some are taking that horizon even further—to 20 or 30 years, the "supercycle" that could last a generation or more. Some investment strategists say that industrialization and the expanding middle class in emerging economies from China to Brazil add up to a third industrial revolution, a prolonged period in which global economic growth shifts from developed nations in Europe and North America to Asia and South America.

Virginie Maisonneuve, head of global and international equities at Schroder Investment Management, uses shifting population growth, climate change, and the long-term outlook for commodities as a framework to understand the world and define the operating environment that companies must navigate. A commodities supercycle is based on the assumption that population growth, infrastructure buildout, and higher protein diets in emerging countries will support long-term demand and higher prices for industrial and agricultural commodities. Competition, demand, pricing, cost, and many other factors that affect how companies function will be touched by those themes, and in her portfolios are stocks that won't benefit or be especially hurt by any of those themes, she says.

Increasing urbanization and expectations for higher living standards as more people join the middle class underlie population growth forecasts for emerging economies, according to a 2010 special report on the supercycle by Standard Chartered Bank.

Although the belief that emerging markets will drive global economic growth in the future is fairly widely held, the supercycle isn't at the forefront of most investment managers' thinking. T. Rowe Price Group (TROW), which manages $32.4 billion in emerging market strategies, prefers to focus on how its assets will perform over the next three to five years, as opposed to the next 20 to 30 years at the heart of the supercycle thesis, says Jason White, a portfolio specialist at T. Rowe Price in Baltimore. Instead of grand themes such as climate change and shifting demographics, White says he considers which industries will likely benefit from emerging market trends. He likes infrastructure, wireless telecom, and banking.

For Schroder, a diversified asset manager in London that runs just under $300 billion in assets, the supercycle doesn't represent such a great stretch of the investing imagination. "The supercycle [describes] the role of large emerging market economies in the global economy," says Maisonneuve. "That is the evolution of the China theme I had for most of the past 25 years," with India and Brazil now joining China as key economic growth drivers for the world economy.

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