How best to handle the Asian opportunity
By David Stevenson
I don’t know a single person alive who would disagree with a strategy of selling high-margin goods into Asia’s vast and fast-growing consumer markets.
Within just a decade or so there will be tens of millions of affluent, middle-class shoppers scouring thousands of shopping malls throughout the continent, looking for the latest must-have items.
China’s growth rate may or may not end up being above 6.5 per cent a year for the next decade (my money is on it being below that) but however you cut it, more of that money has to end up in the pockets of its consumers. Enriching the proletariat is what gives the Communist Party its legitimacy.
So, we can all agree that China and eastern Asia generally are about to bear witness to a consumer growth story that will last for many decades. The question is how to play this beguiling Big Theme.
Plan A is to invest in local companies that sell into the consumer space, perhaps by focusing on leading Chinese consumer staples or services companies quoted on the local stock markets. Except this is easier said than done . . . think corruption, weak corporate governance, restricted markets.
A good, locally based fund manager might help you manage your way through this minefield, but remember that even such a luminary as Anthony Bolton has at times struggled to sort the wheat from the chaff.
Plan B would be to widen the search and look across east Asia. Many of the region’s companies are focused on supplying these Chinese markets – think Samsung, Panasonic, Toyota and so on. Why not invest in a regional Asian consumer sector tracker? But you’ll soon run into yet another problem. Put simply, many leading Asian consumer companies are prohibitively expensive precisely because Uncle Tom Cobley and all have already spotted the same Asian/Chinese consumer growth trend. Stocks within this sector typically trade at humongous multiples to profits, and it’s perhaps best not to even mention the dividends.
Plan C is to buy global but stay local. Burberry, LVMH, Diageo and their ilk all sell heavily into Asia, so the idea is that you get emerging-market growth but with developed-world corporate governance, transparency and liquidity. But I’d wager that yet again, it’s already in the share price. I’d also maintain that Asian consumers aren’t daft and will do everything in their power eventually to wean themselves off dependency on expensive Western brands. Maybe they already are, judging by Burberry’s recent warning.
The central problem with all three plans is that your Big Theme comes with a Big Risk: you end up paying too much for a promise of future growth that may or may not materialise.
But there is another way. Call it the value way – relentlessly hunt down the cheapest stocks within the sector that also happen to boast reasonable fundamentals, based on dividends, profits and assets. The best-known exponent of this approach so far has been Hugh Young at fund management group Aberdeen. His team runs a stable of investment trusts that have delivered superb results for his investors (myself included) largely built on the idea of focusing on Asian consumers, served by well-run local companies, boasting excellent balance sheets and a decent yield.
The bad news is that, as with the other strategies, it’s in the price. Some of these trusts now trade at a premium to net asset value, which makes me ever so slightly worried that his value and income-driven approach might have attracted too much money.
With that in mind, I’d suggest that it may be worth looking at a new kid on this particular “value investor” block. Not Newton Emerging Income – plenty of others are pushing that – but the Asian Prosperity fund, a Luxembourg-domiciled Ucits fund available on most UK-based wraps and platforms. The manager is Greg Fisher, a former chief investment officer at Morgan Grenfell and pukka Asian value fiend.