A thousand-yard stare - that's all you're going to get from Dominic Johnson at the suggestion that after Brexit, Paris may one day overtake London as Europe's leading financial hub.

Upon re-gathering his composure, the old school City man rattles off a host of reasons why Paris will never be number one.

For a start, Johnson, who heads emerging markets specialist Somerset Capital Management, which has US$7.5 billion under management, says there isn't the culture of financial services in Paris that there is in London.

Then there are the high tax rates across the Channel and burdensome regulation which, he says, is highly protectionist.


"Ultimately, you want to be in a country that has proper regulation, that has a good, low-tax environment and where you've got the best people you can hire.

"I love going to Paris - I'm not denigrating the city. But for financial services, London unquestionably has the edge and the culture and the people, so if they want to dominate financial services they're going to have to make some serious changes in how they look at it."

Johnson has strong political ties - he's vice-chairman of the UK Conservative Party - although he insists all that really means is that he has to do a lot of fundraising.

Conservative politician Jacob Rees-Mogg, famous for favouring a "hard" exit from the European Union, is a Somerset shareholder and has an office at the company's London HQ.

But what about Johnson himself. Is he a political animal?

"In this job, you have to be," he says.

We think we've got quite radical politics going on in the West - I don't think we've seen anything yet.

For him, the furore over Brexit is more about democracy than the whys and wherefores of whether Britain should exit the EU.

While the vote to leave was close, the voter turnout was huge - 72.2 per cent - far greater than the average turnout in the past few general elections.


Johnson has family in New Zealand and has a holding in Auckland-based Castle Point Funds, which he says is doing "seriously well in a market where many managers have struggled".

As for New Zealand: "The market dynamics are some of the best I see around the world and the underlying economy is also fascinating in the sense that you have a growing savings pool, a first world economy, but with a link to China in terms of your agricultural sector."


Lumping Brexit in with the rise and rise of US President Donald Trump, Johnson says there has been a sense of disenfranchisement in many electorates "and a greater radicalisation in politics than we've seen in a very long time".

"I think you've seen it in Australia. Luckily, New Zealand seems to be a bit more sensible.

"On top of that, if the people who voted for the more extreme actions see their house prices fall by more than 25 per cent, I think that will cause severe political repercussions.

"We think we've got quite radical politics going on in the West - I don't think we've seen anything yet."

That said, Brexit was a decision taken for lots of different reasons and the decision is one that needs to be executed.

But for Johnson, getting out from under the European Union blanket of regulations will be a big plus for London's financial sector.

"We could get back to being the aircraft carrier that we always were, and it could be very positive for us."

Emerging markets

Christine Lagarde, the head of the International Monetary Fund (IMF), has raised concerns about tightening monetary policy in the US and rising trade tensions between America and China, and the impact that might have on emerging markets.

The IMF, in its economic outlook, this month said emerging markets faced issues such as tighter financial conditions, geopolitical tensions and higher oil import bills. If it's not an easy time for emerging markets right now, Johnson says it never really was.

"We think there will be a big change and it will come as interest rates rise in the Western world, and I think it will come to the advantage of the emerging markets."

Those emerging markets have been relatively flat compared with the US stock market, which has more than doubled in 10 years.

"So if you look at the broad cycle, then you would expect there to be a transfer of attention from one market to another," he says.

Johnson says erosion of the West's economic dominance is already starting to benefit the new, developing economies.

"What's surprising about the new digital world is that it has brought about a concentration of power into fewer hands - one search engine, one social network and one dominant mobile phone manufacturer.

We think there will be a big change and it will come as interest rates rise in the Western world, and I think it will come to the advantage of the emerging markets.

"So we have to factor that in, but fundamentally, the opportunities in emerging markets are very attractive at this stage, given they haven't had a run up, they represent very good value.

"Their currencies have been quite badly beaten up so the downside risk is mitigated, whereas some of the developed economy stocks have run very high and you've started to value them on other criteria other than their earnings, and as soon as you start doing that, you have an issue," he says.

"The end of free money has got to have ramifications that I don't think people have yet fully grasped, and that means you have to be very cautious over the next period."

Nevertheless, the rise and rise of the US markets - and the US dollar - has left emerging markets looking vulnerable.

"That's an issue today, but I'm talking about a broad thematic over the next 10 years.

"Those dollar-debt issues will work themselves out, painfully or not painfully over the next year. But over the next 10 years I think you start to see a shift - a shift in perception and in how people choose to allocate their money."

Somerset's investments run along similar lines to the MSCI's emerging markets index. China, with its 30 per cent weighting, is at the top, and Nigeria is somewhere near the bottom.

"We are completely agnostic, in the sense that the issue for us is liquidity rather than market size or type - whether we can get money into the market and ultimately whether we can get it out if we need to."

Some of the markets are quite deep, such as India, which has one of the world's oldest stock exchanges.

For years it has been a good strategy to take advantage of low US interest rates but it can be quite devastating when the tides turn as they did in the 1998 Asian crisis.

Johnson says the strengthening US dollar can be an issue for companies that have borrowed in US dollars.

"We have not seen any bankruptcies yet. We have not seen any overt, top line pressure that we would expect to see on account of a stronger US dollar.

"It's been quite slow to move its way through the system," he says. "And the emerging market companies - certainly the ones that we buy - are aware of the problems.

"We like to buy high quality manufacturing businesses that are exporting to other markets or selling internally, and clearly an agenda that cuts against free trade is not one that is conducive to global investing - it makes it much harder for us," he says.

On China

Like many people, Johnson is cautious about China, particularly its banking system, which is creaking at the seams.

"Clearly, there is a direction of travel in China in the sense of the growing economy and growing investability of China, and we assume that will continue.

"Some of the financial institutions are hard to analyse given the complexity of local debt and the ballooning of local debt issuance over the last decade.

"Yet at the same time, the market dynamics are phenomenal."

Johnson talks of the Alibaba phenomenon when, upon entering financial services, that company became the third or fourth biggest financial services company in the world.

"You have an extraordinary market dynamic that is impossible to ignore, and it's very exciting."

He says the opportunities on the ground are substantial, and despite the headwinds, he remains "naturally optimistic".

The way he sees it, the world is divided up into 1 billion people who are the "haves" and 4 to 5 billion people "on their way to having".

More broadly, he sees the political upsets of Brexit and the Trump phenomenon as signs of the end of the West's economic dominance.

"We believe that as we look to the next stage in the cycle, post the tech boom, that you will get a good risorgimento (rebirth) of slightly more cyclical, manufacturing, old economy type stocks which we believe will be very attractive as an asset class," he says.

He concedes there are always problems with emerging markets, as there are in the established markets. It's just that they are different.

"I still think there are some opportunities there, but ultimately, the weather is a bit greyer."