LONDON Aug 15 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
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 percent in five years' time, from
less than 20 percent 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 percent 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
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 percent 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. (link.reuters.com/kem42v)
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.
"We cannot really control what's going on in the world, what
we buy are companies where we can see quality in terms of the
balance sheet - whether President Obama slips in the bath
doesn't really matter."
In India and other emerging economies it is not only the
middle classes who aspire to branded products, said
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
Such growth in demand for luxury products has also prompted
AllianceBernstein to invest in Richemont, the world's
second-biggest luxury group, which has rallied 31 percent this
Still, investors in emerging markets cannot disregard
economic, political and currency factors - used in a more
conventional top-down approach - entirely.
"If you only look at bottom-up, you make things difficult
for yourself, because bottom-up does not work in periods like
the one we have been in - the difficult times," said Maarten-Jan
Bakkum, emerging markets strategist at ING Investment
Trends in some sectors such as materials and energy tend to
be reflected across emerging markets, but other sectors may move
in different directions in different countries, he said.
Gary Greenberg, head of emerging markets at Hermes Fund
Managers, looks at specific themes such as the recapitalisation
of banks in China, for example, as a way to pick stocks in the
Chinese financial services sector.
But thematic investing can also run the risk of lumping
together disparate markets.
"The term emerging markets is a theme. A number of different
economies are actually emerging markets - it's a theme which may
or may not be completely accurate."
(Editing by Susan Fenton)