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Journalism of Courage
How do you work out what kind of foods people in developing countries will be eating in a few years time? Go round to their richer neighbours and look in the fridge.
Fund managers AllianceBernstein are taking a leaf out of the multinationals books and doing on-the-ground research to pick consumer trends such as in basic and luxury food items.
Forecasting such trends is one way for emerging equity fund managers to complement a more conventional bottom-up approach to stock selection,whereby investors pick companies purely on their individual cash flow and balance sheets.
Projections that the number of households in India that own a refrigerator will jump to 50 per cent in five years time,from less than 20 per cent currently,have led AllianceBernstein,which manages $3.5 billion in an emerging consumer strategy,to invest in dairy companies,not fridge makers.
It sees better growth potential for well-known brands of products that need refrigeration,such as goods manufactured by Nestle or Danone.
We want to know where the companies will go before they themselves have decided, said Tassos Stassopoulos,fund manager at the firm. We are doing the research like a company,we are doing the research ahead of them.
Focusing on sectoral trends means fund managers are less likely to miss out on the main growth areas in emerging economies,which they might do if they concentrate on company valuation or revenue targets,Stassopoulos said.
Investors are also looking at different approaches to beating emerging stocks underperformance in the past few years.
Emerging stocks have fallen nearly 10 per cent this year,underperforming gains in developed world stocks Western companies with emerging markets exposure have also performed badly.
The approach also provides an alternative to the top-down method of judging emerging markets by the economic outlook of the countries in which they operate,a method more commonly used in currency and debt markets than for stocks.
Linking stock market returns to GDP forecasts is foolhardy,judging by the lack of correlation between the two in the past few years.
A study by London Business School academics Elroy Dimson,Paul Marsh and Mike Staunton in 2010 showed that emerging market equities averaged an annual return of 9.5 percent between 1975 and 2009,based on a composite of S&P and IFC indices. That was less than the 10.6 per cent return on developed market equities even though emerging economies grew at a much faster pace than their advanced peers over the 34-year period.
A recent study by BNP Paribas Investment Partners also highlighted little short-term correlation between GDP growth and equity market performance in emerging markets.
China has shown a particularly weak correlation between its economic growth – one of the fastest in the world in the past decade and returns in its stock market. The MSCI China index has tumbled 30 percent since 2007.
We are about as bottom-up as you can get, said David Cornell,chief investment officer of Ocean Dial Asset Management,which runs an India equity fund.
In India and other emerging economies it is not only the middle classes who aspire to branded products,said AllianceBernstein.
Fast income growth is transforming lifestyles quickly so someone who now relies on cheap unrefined sugar to quench their sweet tooth could just as easily be buying a premium product like Haagen-Dazs vanilla fudge ice cream soon.
Haagen-Dazs is owned by Nestle. Shares of Nestle India have risen only 2 percent this year but have doubled since 2010.
Such growth in demand for luxury products has also prompted AllianceBernstein to invest in Richemont,the worlds second-biggest luxury group,which has rallied 31 per cent this year.
Still,investors in emerging markets cannot disregard economic,political and currency factors used in a more conventional top-down approach entirely.
