Index investors risk missing Asian consumption growth, says Mirae AM

Passive investing in China will fail to capture the full extent of China’s consumption growth, as indices hold just some of the beneficiaries and still rest on heavy goods exporters, says Mirae Asset Management.

Joohee An, manager of the $50.4bn asset manager’s Asia Great Consumer Equity fund, said investing according to the country benchmarks covered “less than 10% of the total opportunity” of China’s consumption boom.

“Three or four years ago you could just have invested in the benchmark, because it constituted companies exporting to Europe and the US, but now we have to focus on the consumer.”

The Asia portion of Mirae’s US-domiciled GEM Great Consumer fund, which An manages, has made 19.1% since September 2010, versus a 0.4% fall from the MSCI Emerging Markets Asia (Net) index.

This fund, and An’s own, are two of four ‘Great Consumer’ vehicles Mirae runs. Another, domiciled in India, is focused on India, while a US mutual fund is focused on Asian consumption.

An expects further domestic consumption growth in her region.

She said Beijing’s latest Five Year Plan made clear China’s economy will be shifted from heavy export reliance, to a model encompassing domestic consumption.

This becomes possible as China’s average per capita income is at $7518, well above the $4000 threshhold oft cited as a tipping point for free spending.

Consumption growth also reduces China’s reliance on an increasingly debt-burdened West.

An said when investing it was important to heed Beijing’s plans, as sectors that win from them are effectively supported by official edict. Beijing has targeted an increase in consumption from 35% of GDP, to 50% over time.

She added widely used indices are poor guides to the full universe benefiting from such a change.

Index exposure might be evident in regards to discretionary and consumer staples stocks – a narrow band of sectors to benefit from domestic consumption.
But it is less evident in regards education, internet growth and hospitals/pharmaceuticals, which could also win out, she said.

“The benchmarks have areas like department stores, beverage and food, sportswear and packaging, whereas I am positive [also] on the consumer services sector, areas like the internet and tourism.”

Consumer staples trade on valuations of 25 to 30 times, but carry the risk of scandals, she said. Discretionary stocks on 10 to 16 times, meanwhile, are in her view “at a premium”.

In off-benchmark areas like education, An highlighted stocks like private sector educator New Oriental Education. “Spending on education is a top priority for parents, and if they want to save money or spend it, they cut other spending,” she said.

Consequently, NOE could increase enrolments by 20%, and revenues by 42%, for each of the past five years. Its stock grew eight-fold, versus 45% increases by the index.

In the internet sector she pointed to SINA Corp, owner of China’s popular Weibo social media site. Beijing recently encouraged its officials to use the site. Beijing “wants to communicate with its people, it realises it cannot control them,” An said.

She added, while there was a price bubble forming among some Chinese technology stocks, it was not the higher quality ones she focuses on. An has shunned investing in some equities, despite prices jumping sharply on IPO-day, if no longer-term thesis exists for investing.

An can also buy ADRs of Chinese IT companies listed on Nasdaq.

She generally does not like China’s pharmaceuticals sector, whose goods’ prices she says are too centrally controlled.

At 4.7% of GDP, China’s expenditure on healthcare ranks above the region’s lowest nation, Indonesia, which is at 2.4%. However, An prefers pharma stocks in Indonesia, where the OTC market grew by 13.6% a year from 2003 to 2008 – the fastest in south Asia over the period, and 22% more than in China.

An also prefers property equity investing in Indonesia over China. “The potential in Indonesia is very large as long as they have land banks, and execution risk is low.”

Overall, she said Asia has favourable demographics for rising consumption.

These include growing wages, a young populous more likely to spend discretionary cash, growing working populations, a high population (55% of the globe) in absolute terms, urbanisation and an expanding middle class.


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