This article is authored by MOI Global instructor Roshan Padamadan, chairman at Luminance Capital, based in Singapore.

Roshan is an instructor at European Investing Summit 2024.

Many decades back, India had a moniker for its rate of growth called the Hindu rate of growth: Coined by an Indian economist, Raj Krishna, in 1978, it was meant to denote the 3-4% growth rate seen by India in the 1960s-1980s. It was not a compliment. Peers, other former colonies in Asia, were booming. E.g. Singapore moved from a port city-state with no natural resources, and a barely educated populace to a First World nation, within about 30 years. The moniker conveyed a level of fatalism and contentment, as if India chose, or was forcibly choosing a low level of growth to ensure its socialist policies were effective. India was under a heavily constrained regime where every business activity was subject to licenses and quotas, called the License Raj.

Followers of India know that India broke out in 1991, with the dismantling of the License Raj. India joined the WTO in 1995.

Coming to the present moment, India is considered to be one of the beacons of global growth, growing when others are slowing. Perhaps it is the story of the hare and the tortoise. India has made itself a global leader in a couple of areas – software services and generic pharma products. In other areas, it wants to get better, but the result is not yet clear. India now makes 14% of Apple’s iPhones, a significant shift for a country not hitherto known for global manufacturing prowess. Can India become a major manufacturing hub? It might – especially if it imports tech and know-how in the early years.

India’s other export – Indian-origin CEOs – sadly do not count to India’s GDP. Several of the top Tech companies have Indian origin CEOs – Microsoft, Google, Adobe, IBM, etc.. Looking at the broader Fortune 500, the percentage is still significant, at ~30%.

Looking at expected growth rates for the next two decades:

Looking at these World Bank and IMF forecasts, it appears that the Developed World is looking at a much lower rate than even half the Hindu rate of growth. What does this mean for investing? Should one only invest (only) in high growth economies?

Factors of Growth

Growth comes primarily from two factors: population growth, and growth in productivity.

India is at the top of this list of expected fertility rates for the next 2 decades. Europe is not far behind the USA.

But there is one key difference: the USA has much higher net immigration rates. Most or all the Indian-origin CEOs made their mark in the USA, not in Europe.

China’s population is shrinking, the effects of the one-child policy coming home to roost. Europe has zero population growth in the decade of 2034-2044, per the UN.

On productivity: As the population becomes more efficient, GDP grows. E.g. An intern learns mail merge, and can send out an email to 50 people in five minutes, instead of 50 minutes, that’s an increase in productivity, which will flow through over time to higher revenues for his or her firm. Do this across the population, and you have GDP growth. Look at countries like Luxembourg which punch way above its weight. Denmark and Netherlands are good examples too. Ireland is skewed due to its tax haven status, and both Switzerland and Luxembourg are boosted by large wealth management practices.

Some analysts like to look at how productive a company is, looking for over, say, USD 200,000 per person per year as a thumb rule. I know a startup CEO who uses this metric to see if he is being efficient with his workforce. He lives in Dubai, his HQ is in California, and his main development team is in Bangalore. Where is Europe in his world view? He is looking at a pure tech company in Europe that owns patents, which he can leverage.

This is perhaps the key to Europe’s future growth: leveraging its advantages in tech and know-how. Know-how is a bit softer than pure tech –- it is the combined knowledge of a workforce, built up through experience.

Europe is rich in culture and heritage. So many of the current inventions came from the Renaissance. While it’s possible that they were invented before –- China claims to have invented/discovered almost the same things a few hundred years earlier — Europe still should get credit for (re)inventing and (re)discovering on a first-principles basis.

Follow the Growth

European companies can take their know-how around the world and grow – there. Follow the growth, could be a mantra for the coming years. This is possibly one of the few ways to prosper in a low-growth environment, where local EU rules rival the Indian License Raj, and total fertility rates are falling.

French entrepreneurship visas for example have circular rules – one already needs to be a long-term resident before they apply for a permission to have an entrepreneur visa. This rules out non-residents moving there to start a business. Take Ageas SA, as an example of an European company embracing global growth. It is an almost unknown Belgian insurance company, carved out from the former Fortis group. Its market cap is around EUR 8.8bn (a lucky number, by Chinese measures, where the number 8 sounds like the word for prosperity).

Ageas makes ~50% of its revenues from Asia. More than 2 decades back, it made a prescient investment in China. It has an almost 25% stake in China Taiping, China’s 5th largest insurer. This now provides about 30% of group revenues. And another 20% comes from South East Asia, in a tie up with Maybank, under the brand Etiqa. Ageas is in 14 countries, and it does not particularly care to roll out its name – it is agnostic to financial investments; or operating with a local partner’s name; or going to market with a new brand name/ JV brand (e.g. Etiqa). This is a good example of leveraging know-how, bringing product knowledge, and risk management expertise to the table.

This imported growth makes Ageas stand out, like a giant among dwarves, as low population growth and low productivity growth hamper Europe’s chances of increasing its standard of living substantially in the decades to come. Ageas pays a nice dividend (~7%+) and has enough cash flow to buy back stock at a decent clip (~1.7% of market cap)

Europe has not had a tech wonder at the level of Apple, Facebook, etc.. We need to reflect on why that is the case, because the average education level is very high. The French are known for amazing math skills, the Finns regularly top test scores, and the Germans abound in PhDs.

My observations are twofold: (1) Language barriers fragment the market, both in terms of labour markets and consumer markets. (2) The nation state is still very powerful, and nationalist sentiments prevent consolidation, and economies of scale.

Recently, while in Paris, I bought a Red Bull intended (originally) for the Swedish market. No one could figure out the flavour written on the can – skogsbärssmak – until I used Google Translate (an American invention). Even Andrea Orcel (CEO, Unicredit) may have struggled to solve that one- and he speaks 5 European languages. The distribution for Red Bull Limited Editions was inconsistent, I never knew what flavours I would get in what shop, and it was a bit of treasure hunt. Imagine the job of the Reb Bull supply chain manager – he/she has to decide how many cans to print in each language, for each flavour – English, French, German, Italian, Swedish, etc. And if they remain unsold, they have to be diverted to another country, where perhaps no one can read the labels.

UniCredit’s (from Italy) move to buy Commerzbank (in Germany) may well get shot down, as the German establishment does not want an Italian bank buy one of its own. For a non-European, it appears to be one European bank buying another. Arguably, a non-German buyer will probably result in lower job cuts, and lower overlap, than if the buyer was another German bank. A common market is a true single market only if consolidation is not blocked on national lines. With the rare exception of Airbus, we do not see many European champions, only national champions.

The Rise of Artificial Intelligence

Revolutions are great levelers. Can Europe use the AI revolution to increase productivity while enjoying a high quality of life? Software stacks can be rewritten much more easily and a lot of reinvention is going to happen. Young upstart companies can pop up anywhere. Given Europe’s high latent talent pool, perhaps a new Terravision can arise. Terravision was a young team from Berlin that came up with a product that was later contentiously replicated by Google Earth (Netflix has a show).

The revolution is that AI means that a 5-person team can probably make a product that would have required 20-200 people to make in the old paradigm. Usually software development involves many teams working together – product , software, UX/UI design, testing, etc. AI is increasingly being used in technical product design, and it can write code – that can work right from the first run.

Which software stacks would get rewritten first? Simple, niche vertical software? Or complex expensive and expansive software, with a whole new design paradigm. Or somewhere in between?

Klarna, the flexible payments company, headquartered in Stockholm, sent shivers down the software world when it announced in mid-September 2024 that it will exit the use of Salesforce (arguably the world’s most widely used CRM) and Workday, a leading limited-scope ERP system, focusing on HR and Financials.

Having been an ERP implementation specialist, I have seen how it works across many different modules, and the interconnection points are many for a highly sophisticated system such as SAP, or Oracle 11i/12, where it can integrate manufacturing, shipping, financials and HR, and so on. It took me 2-3 months of full days of training to get Oracle ERP certified.

Comparatively, the workflows of Salesforce is simple. I have used far cheaper versions than Salesforce and enjoyed high productivity. (Hat tip to Nimble CRM).

Workday primarily has a 2-module focus, Financials and Human Resources, with the latter being the traditional core base. Having worked extensively on Workday Financials, and being a classically trained ERP specialist with Oracle 11i and SAP Financials expertise, I can say that workday Financials makes the use accept several shortcomings and live with it. I am not surprised that someone is saying they are willing to reinvent it.

Now it is a different matter if Klarna will find it worthwhile to invest the time and effort to use it purely in house. But I do believe it is open season for a competitor of Salesforce or Workday to launch an attack, with a simpler stack, reinvent the software and offer a cheaper version, because it now costs way less to build new software.

Europe has a high level of technical and technological knowledge and if it is tapped well, Europe can continue to squeeze productivity gains. Don’t give up on the next tech wonder coming from Europe– just do not surprised if they launch their product in the USA, due to (relatively) simpler regulations.

For now, some of the largest market cap companies in Europe sell fashion to the Chinese – e.g. LVMH, Hermes. That’s not very sustainable over a period of the next few decades. The look-up-to-the-West is a very delicate balance and the 4000-year-old (Chinese) culture can easily turn away from the LVMH/Chanel/Dior/Hermes preference it currently shows. That fashion sense alone perhaps is not going to save Europe. That demand is fickle, especially if tensions flare up over issues such as Taiwan – e.g. the Chinese can easily boycott French product if France sides with the USA in any issue involving Taiwan, for example. Homegrown Chinese brands are growing, and it’s a matter of time before China creates its own super luxury brands. Did you know that the luxury all-inclusive vacation you spent at Club Med, you were enjoying the services of a Chinese conglomerate? I met Fosun Group in Shanghai. They have 10 listed entities within the group, and make about half their money from outside China.

China’s rise as a great power was visible at the Paris Olympics, tying the US with 40 gold medals. At the Tokyo Olympics, China was just one medal short of the US (38 vs. 39 gold). To see the ascendancy of a nation, compare this to the dominance USA had in Rio (2016) : USA 46 gold medals, vs. Great Britain 27 and China 26.

Rounding up my treatise on European growth, I believe Europe’s companies should study AI closely to see what can be done, and what could be done to them. AI is levelling the playing field and Europe’s companies need to innovate or partner up or risk falling by the wayside.

European companies should embrace growth, and go to where growth is booming- figure out ways to get exposure to India and China and others economies in Asia. Asians work much harder than Europeans – words for death from overwork exist in Japanese (karoshi), Chinese (guolaosi) and Korean (gwarosa), while such terms are not common in European languages.

If you can’t beat them, join them. This could be a good motto for Europe in the coming decades. The technological lead over the last 500 years is now narrowing. Europe is now afraid of China’s cars. They are just better value-for-money and we saw the unthinkable news that Volkswagen is considering job cuts at its home base, Wolfsburg. Perhaps one way for Europe to participate in Asian growth is to ally with it. Bring its technology to Asia – and also be willing to import it when Asian companies are at a better level. I went to test drive a BYD, and was surprised to find a café inside the car showroom. They had a full menu, and I enjoyed an excellent craft beer – after my drive.

Stellantis is the new name for the merger of the former Fiat Chrysler and the Peugeot group. This entity now owns Fiat, Jeep, Maserati, Alfa Romeo, etc.. Stellantis is making a multi-platform bet, embracing a way to make ICE, EV and hybrid cards on the same production line. Such a technology-agnostic approach may serve it well, as it simplifies all its over 20 types of cars to a 5-platform model. Apart from this, the most interesting part of Stellantis is its 20 % ownership of Leapmotor, a Chinese EV maker. And the rights to market Leapmotor outside China. The DNA to think innovatively and to enter into such a partnership is my definition for how Europe should diversify and grow. Whether the partnership succeeds or not is not the topic – I am pointing out that such cross-country partnerships may be the key, to not just survive, but prosper.

I would happily retire in Europe and enjoy the beauty and the culture. But if I seek growth, I look for ties to Asia and the U.S., and an eye on AI.

I may or may not have positions in any of the stocks mentioned, and may be recommending buy or sell actions to certain clients, where I have considered their overall risk profile. Nothing here should be considered a buy or sell recommendation. Please work with your advisor for a balanced portfolio.

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