The global middle class is expanding. Due to this phenomenon, which transcends international borders, an economic force is gathering momentum. Downing Fund Managers created the VT Downing Global Investors Fund to unlock the investment opportunities being generated by this growing demographic.

How is the growing middle class impacting the global economy?

To put the size of the middle class into perspective, there are approximately one billion people living in G7 countries (Canada, France, Germany, Italy, Japan, the UK, and the USA) and they are broadly all middle class. That leaves approximately six billion people living outside of the G7 and they can broadly be classed as an emerging or latent middle class.

But, what does that mean? The six billion people are gaining formalised incomes from which they pay taxes (which pay for health/education/roads etc) and get loans (leverage). This process of collateralisation and gearing creates a multiplier effect. That is each additional dollar earned itself creates multiple extra dollars of value.

Over the current decade, the G7 middle-class population is expected to grow at around 1% per annum*. The middle-class population outside G7 is expected to grow at around 6% per annum. That is middle-class growth should be six times higher within a population six times larger.

Reasons to be cheerful about the markets

On top of this background scenario, markets themselves are showing signs of optimism after 18 months or so of a bear market.

Forward interest rates have been flat this year. The 30-year US treasury rate currently stands at 3.9%. The 10-year rate stands at 3.65%

• Long-term rates are higher than mid-term rates, implying expansion in the global economy
• Murmurs are coming from central banks that the rate of ascent of short-term rates will slow or stop
• There is mounting anecdotal evidence, seeping out as the reporting season progresses, of easing supply chain issues
• Commodity markets have been flat or falling this year
• In our experience, Capex industry valuations are ticking up. That includes the global semiconductor industry (which has been reporting difficult conditions) and a re-emergence of Japan on the investor radar. More often than not, internationally operating Japanese businesses are industrial enterprises. These observations imply market risk appetite is rising as markets anticipate an expanding global economy
• Again, in our experience, more companies are reporting both results from recent periods and forward guidance ahead of expectations than behind

However, markets have remained flat for at least a year. This means they have derated materially. Higher profits and higher anticipated profits plus a flat share price equals a lower price per unit of profit – which is a result of higher interest rates. That combination should tickle out the value investors to join in with growth investors. This suggests that a much more dynamic market psychology can form.

Perhaps even the geopolitical counter currents are also being more positively addressed. In addition, markets seem to have worked around falling supplies of energy, food and materials by funding production elsewhere. Similarly, the energy transition away from fossil fuels has received a massive boost from the war in Ukraine.

The China/West trade friction is causing reshoring (bringing production back home) or the migration of production elsewhere. That spreads the benefit of economic engagement much more widely to the benefit of India, Indonesia and Latin America. So China’s loss becomes a multiplied gain across many other regions.

In summary

There are rapidly gathering reasons for markets to progress. I am very happy and willing to meet with any IFA’s who you feel might want to engage with this much more constructive background for their clients.

Anthony Eaton

Fund Manager, VT Downing Global Investors Fund

_{*The World's Growing Middle Class (2020-2022), Elements by Visual Capitalist, February 2022 and Developments and Forecasts of Growing Consumerism, European Commission, September 2018}

Opinions expressed represent the views of the fund manager at the time of publication, are subject to change, and should not be interpreted as investment advice. Please note that past performance is not a reliable indicator of future results. Capital is at risk.

This document is for information only and does not form part of a direct offer or invitation to purchase, subscribe for or dispose of securities and no reliance should be placed on it. Downing does not offer investment or tax

advice or make recommendations regarding investments. This document contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Downing LLP as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. Downing is authorised and regulated by the Financial Conduct Authority (Firm Reference No. 545025). Registered in England No. OC341575. Registered Office: St Magnus House, 3 Lower Thames Street, London EC3R 6HD.

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