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Angus Tulloch: Asian consumer has gone off luxury goods
Angus Tulloch, manager of the top First State Asia Pacific Leaders fund, discusses the trends he saw on a visit to the region.
First State's emerging market investment veteran Angus Tulloch has warned that consumer appetite for luxury goods is slowing sharply across much of Asia and that the recent China-led modest recovery in commodity demand is likely to peter out.
Slowdown in demand for luxury goods
Tulloch told Citywire that while the long-term Asian growth story remained intact, recent increased public hostility to conspicuous over consumption was not only affecting sales of top end Western brands, but also dampening many of the region's property growth stories, as stricter taxation rules have been applied.
Tulloch runs the First State Asia Pacific Leaders fund, a 'star pick; of our Citywire Selection analysts. He also heads up the emerging markets team which includes Alistair Thompson's First State Asian Growth I and Glen Finegan and Jonathan Asante's First State Global Em Mkts Leaders fund, also expects the Australian dollar to weaken significantly over the coming months.
Tulloch told Citywire: 'From our most recent trip we have noticed that the growth in demand for luxury goods has fallen dramatically, particularly in Korea and Taiwan.'
'We think the consumer has turned more cautious in North Asia and we also noticed it in China at the start of the year. There has been a lot of negative sentiment towards ostentatious consumption and with a big focus on corruption in China, over spending has become frowned upon.'
Tulloch says that the very highest end products such as Chanel and Prada have been relatively resilient but the next tier, led by the likes of Burberry (BRBY.L) and Hugo Boss, have suffered falls in demand over recent months.
'The growth story remains intact but a focus on company specifics is crucial as margins are being squeezed so access to working capital is crucial.'
He also believes a renewed focus in the region to get tough on property speculation has cooled local property markets as governments get tougher on second home ownership. He cites Hong Kong and Singapore as the most recent examples, where onerous new taxes are being levied against foreign property owners looking to sell property within two years of buying.
'China has already introduced new taxes and now Hong Kong and Singapore have. China is worried about a political backlash and further instability, so has a huge focus on affordable housing. If the annual growth gets into double figures they will act.'
Tulloch poured cold water on recent renewed optimism that China is starting to up its demand for raw materials again despite recent better numbers from some commodity stocks.
'There has been a lot of de-stocking so we have seen a bounceback over the past three months but China is still trying to switch to a much more consumer focused economy so we don't think this trend is sustainable.'
Aussie dollar to weaken
Elsewhere Tulloch is concerned that the Australian dollar will come under further pressure as weaker Chinese commodity demand and a relatively anaemic domestic economy start to weigh on the currency.
'The Aussie dollar is a very volatile currency. Interest rates have been coming down and the domestic economy is quite weak but it has held up due to a lack of alternative currencies. We expect it to come off quite sharply which is why all our Australian companies have a strong overseas flavour, or in the case of Newcrest Mining, are dollar-denominated.'
Top 10 holding Australian insurer QBE was a notable laggard in the fund in 2012 with Tulloch saying a previous US acquisition had hurt numbers but Tulloch believes that the firm remains a long-term winner.
'At some point interest rates will go up and people have to accept that climate change is happening. Despite its mistakes we really like the management team.'
A position in Australian gold miner Newcrest was halved to 3.5% over the past 12 months on short term production concerns but with it now trading at depressed levels Tulloch is tempted to build exposure again, particularly as he sees the company as an insurance policy against the effects of further Japan-led QE in the region.
'Newcrest has gone from $40 to $23 so we might look to add again. It has strong management, good deposits and strong social responsibility.'
The fund has very low exposure to luxury consumer goods, preferring to play consumer demand through telco companies in the region, although Tulloch said that Korean cosmetics firm AmorePacific had been a notable exception, performing strongly due to a strong local market for its goods.
Indian telco Bhati was added recently as Tulloch and Thompson believed the negative sentiment towards India's regulatory restrictions on telcos had become overdone.
With Malaysian-listed telco Axiata having a strong year primarily due to its growth in the Indian and Indonesian market, healthcare has been the other key outperformer. Australian firms Resmed and CSL have led the way, reporting strong growth in Asian markets.
'Normally we don't tend to outperform in a rising market but this year we have led the way, as there has generally been a flight to quality, and to the sort of companies we focus on.'
Over five years to the end of November First State Asia Pacific Leaders has returned 62.3% compared to the FTSE AW Asia Pacific ex Japan return of 30%.
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by Gavin Lumsden on Jun 29, 2015 at 17:07