Mark Dampier: Eastern promise for 'boring' firms in emerging markets
Saturday 25 August 2012
If you are in your 20s or early 30s, or you know someone who is, you can't fail to notice how tough the economic environment is for them. Many twenty-somethings face large debts and a struggle to find employment. The dream of owning a home is often unattainable.
Some, no doubt, have been disillusioned by the expectations that politicians, and for that matter parents, gave to them. They have been pushed into university only to find, three or four years later, there is no job guaranteed at the end, and they have racked up huge, student loans. Sadly, this is likely to be the first generation to end up poorer than its parents.
Two figures explain this unfortunate phenomenon: $135 and $12. The first is the average amount Western workers get paid each day. The second is what an average Chinese worker gets. Bear in mind, too, that Chinese wages are being pushed up at around 20 per cent per annum and they are losing out to places such as Vietnam.
What we are witnessing is increasing competition from a rapidly-urbanising emerging world. In essence, five billion people who were previously shut out of global markets through politics or poverty are striving to become like us. They are highly motivated, and frequently highly aspirational. Others, given the lack of social safety nets, have the ample incentive of simply avoiding poverty.
You might suppose that because most jobs in emerging markets are labour intensive, they are no competition to us here in the West. After all, intellectual property and specialist expertise should give us the edge. However, that is not necessarily the case anymore. Last year, 10,000 science PhD students graduated from Chinese universities, so the competition is reaching the high end too.
It may be depressing, but for a long time the West has had it easy. We are now facing grim, commercial reality. However, the long-term theme of urbanisation and empowerment in emerging markets is also an important investment trend, and Anthony Eaton, who manages the J M Finn Global Opportunities fund, believes it will be a highly profitable one.
Economic growth in the West is anaemic, and although there has been a modest improvement in the US, it is likely to be sub-par for quite some time. By comparison, China's growth rate, according to its latest, five-year plan, should be around 7.5 per cent for the next five years.
It is not alone. Indonesia expanded at 6.4 per cent from a year earlier in the second quarter following a boom in internal consumption, which more than offset a decrease in exports. As Mr Eaton points out, most people in these nations probably don't even know where Spain, Italy and Greece are – and they probably don't care. The West is far less relevant to their economic success than it would have been a decade or two ago.
As incomes continue to rise in emerging markets, newly affluent workers are able to spend more of their money on consumer products and luxury goods – not just the basics needed to survive. Interestingly, this is where the West can have some success. Just look at the buoyant share prices of companies such as Unilever and Colgate-Palmolive, companies that are said to be defensive and boring. Their products are highly sought after in emerging markets and as wages rise further they will sell more, increasing their earnings.
Mr Eaton is seeking out these types of companies, looking for established businesses with a clear lead in their respective markets – so it is tough for others to compete. He especially looks for firms with "pricing power", the ability to pass on any cost increases to customers. Presently, he believes this favours firms selling consumer and healthcare products where there simply isn't enough production to keep up with demand. This is in contrast to companies involved in the production of raw materials. Here he detects plenty of supply, so mining stocks only receive a 4 per cent weighting in the fund. However, he will shift the fund according to where he sees the greatest pricing power, and miners have been a major theme in the past.
While it brings challenges here in the West, the powerful growth of emerging-market economies is exciting. We must adapt and move with it.
Just as we must accept that a university education no longer guarantees a successful career, we should harness the opportunities that change brings. Mr Eaton is a man who has grasped the big picture and is investing accordingly.
Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial advisor and stockbroker. For more details about the funds included in this column, visit www.h.l.co.uk/independent
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