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Over the last ten years the Chinese economy has grown by one and half times, and the Indian economy has doubled. In contrast the UK and the US have managed growth of one fifth, whilst the successful exporters, Japan and Germany, languish with only 7.7% growth over the ten years. These figures are changes in total Gross Domestic Product in constant prices measured in their local currency. If you measure them all in dollars of the day you end up with a similar ranking, though all the numbers are much bigger. China has risen by more than 300%, India by almost 200% and the UK and the US have managed to grow by around one half. Germany looks better on this measure than Japan, but Japan is still very poor.

If we look at the immediate past and the prospects for this year we will see a very similar pattern. China and India keep growing quickly. Meanwhile the US lost 2.5% of its GDP in 2009, the EU 3.9%, Japan 2.7% and the UK 4.6% (Source: Thomson Reuters). A poll of independent forecasters thinks this year will see 2.6% growth in the US, but an anaemic 1% or so in Japan, the EU and the UK.

Why should this be? There are three main reasons. The first is, China and India have the advantage that they can catch up with Western technology and productivity levels. Each has a big army of potential employees to come off the land into more productive activities. Living standards are still far lower than Western ones, leaving plenty of scope for growth. The second is because people are still relatively poor and their welfare states badly developed, there is a great incentive for them to work hard or to set up a business and try their luck at commerce. They are hungrier than us. The third is, these are huge countries with very large populations. If India and China are just half as successful as the US in twenty years time, they have will each have economies double the size of the US.

What could go wrong with this scenario? Either of these giants could encounter substantial political problems. China might grow tired of communist control and enter a time of troubles as they struggle for power and new constitutional forms. Indian democracy can throw up a series of weak governments and coalitions which fail to control the Indian tiger economy, making mistakes that could harm the growth rate. Both countries might struggle to control the inflations they have unleashed to ensure they grew across the world recession or got out of it quickly. Both currently need tighter money and higher interest rates, but are nervous of the economic and political consequences of doing that.

So far markets have been kind to these growing giants, usually rewarding investors prepared to money there in the relatively early stages of their growth. In bad times people have lost more money more quickly, as in 2008, when investors took fright of all risk assets. Many tried to sell their positions in more exotic equity investments. Most who held on have done well, and anyone who bought in 2008 has done very well.

Our view is that despite the obvious political and economic policy problems China and India face immediately and in the longer term, these economies are likely to grow a lot faster than the West for the foreseeable future. This does not necessarily translate into higher stock market valuations. That depends on the starting level you buy into the markets, and on the conduct of their domestic monetary policies which will affect asset values.

On the bull side of the argument is the astonishing fact that most western investors have missed out on Indian and Chinese growth so far. Many have had no direct exposure to these equity markets. Even the bold investors have typically only managed 5-10% in such Asian equities, whilst holding maybe 50% in US and UK shares which have done so much less well. We expect more western investors to want to have higher exposure to these sources of growth this decade, providing a steady stream of foreign buyers. There will also be plenty of domestic buyers all the time these two countries run relatively loose monetary policies, allowing their home share markets to rise. In the case of China investors need to understand that this is a communist country which licenses limited economic freedoms. The share market level is a matter which the authorities intend to influence, so you need to watch what they do and listen to what they say.

On balance we therefore think it still a good idea to have substantial investment positions in emerging markets, with the accent on the two Asian giants. We have been running around 25% of a typical portfolio in emerging markets generally.

On the other side of the world and portfolio, we would have less in US and UK shares than the average western portfolio. Both countries have over borrowed. Both are sorting out overextended banking systems. Both have to take action at some point to control their ballooning public deficits. The UK is in the far weaker position, with a larger banking system in trouble relative to the size of the economy, a far larger public sector relative to the size of the economy and a larger quantitative easing programme. The US will benefit from having the world’s main reserve currency. That leads us to avoid all UK government bonds and to prefer shares in other faster growing markets as well.