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First State’s Asante: further QE will spark next crisis
Jonathan Asante, who manages the First State Global Emerging Markets Leaders fund, says economic stimulus efforts are creating the conditions for another crash.
First State Global Emerging Markets Leaders fund manager Jonathan Asante has warned investors that the strong returns made on the £3 billion fund over the past five years will not be repeated over the next five.
The Citywire Selection star pick fund has returned annualised growth of almost 13% in each of the past five years, but Asante and co-manager Glen Finegan are wary that emerging markets may be moving back towards bubble territory owing to continued global 'money printing' stimulus efforts, which is also sowing the seeds for the next financial crisis.
‘We have delivered acceptable returns over the past five years but for the next five-year view we expect returns to go down. We are faced with low growth, a potential boom and bust and a possible eurozone break-up, so returns will be lower in real terms,' Asante said. ‘We don’t think emerging markets are in a bubble like 2006 yet, but they could get there if the money printing continues.’
QE: a 'huge threat' to global economy
Asante described further quantitative easing as a huge threat to the global economy. ‘In a world where money is continually being printed nominal returns don’t mean much.
We are very concerned by the financial repression caused by [QE]. Bond markets are rigged to force people to accept lower returns in other asset classes. It creates another boom and bust for the banking sector, lower growth, higher volatility and low returns on equities.’
Asante is also concerned about various ‘destructive forces’ which he expects to destroy a whole raft of global franchises over the next few years and has particular worries over the telecoms sector as its pricing power becomes ever more eroded by new technology.
‘There is a huge risk to telcos as smartphones can use Skype and FaceTime. This will become very destructive for their business models. We are now spending half our time thinking what will go wrong and lose us money rather than make us money.’
Asante’s large overweight to consumer staples with global reach remains in place at almost three times the benchmark weighting, although he has been reducing a number, including former top-10 holding South African supermarket Shoprite, after a strong run that had seen it rerated to trade at 26 times one-year earnings.
South African overweight remains
Similarly, Hindustan Unilever has been replaced by its UK-listed parent Unilever (ULVR.L) as it got to 30 times one-year earnings. Beverage giant AB Inbev has been sold while rival SAB Miller has been increased as the latter looks markedly cheaper. Rival South African consumer goods group Tiger brands is also a top-10 holding.
‘We view SAB as better quality at a cheaper price. SAB only has 12% of its operations in South Africa at the moment but there is big growth potential. Tiger Brands has just signed two big deals in Nigeria and is a cheaper way to play the rise of mass Nigerian consumption than Unilever Nigeria.’
Although Asante looks at stocks that can continue to grow regardless of their geographical location, South Africa is a marked overweight in the fund at 16.3% compared with the benchmark’s 7.8%.
Asante has also just taken a 1% stake in South African platinum miner Impala (IPLA.L) after its share price collapsed after recent industrial unrest in the country, sparked by the strikes and subsequent shootings at Lonmin (LMI.L)’s Marikana mine in the country.
‘It is my first platinum mine, but Impala is higher quality than Lonmin with better transparency. It looked extremely risky before the recent [share price falls]. It looks potentially less risky now as the government and management look to work together. It is the best company in the sector with a new chief executive from Australia, and returns look high on a three-year view.’
Chile: Latin America's 'real success story'
Asante also continues to like Chilean retailers, with the country providing 6.4% of the fund compared with the benchmark’s 2% at the end of September.
‘We prefer Chilean risk to African risk. It is the most transparent Latin American market and the real success story in Latin America. We prefer Chilean retailers on 17 times earnings with the potential to grow much bigger, to Hindustan Unilever on 30 times.’
The largest position remains silicon wafer Taiwan SemiConductor at around 4.6% of the fund, but the managers have been reducing the stock recently as global growth slows.
‘It is a great company but it is a tech manufacturing firm and the test is, can you tell yourself it will still be making money in 20 years’ time? We know that Colgate and Unilever will definitely exist but look at what has happened to Nokia. We don’t know if firms like [TSMC] or Apple can have sustainable growth and if you cannot be sure, you have to lowly rate them.’
In the five years to the end of September the fund has returned 76.4%, easily beating the MSCI Emerging Markets return of 20.1%.
Citywire Selection verdict:
Jonathan Asante and Glen Finegan follow the First State Stewart house style of avoiding government-backed companies in emerging markets and focusing on companies with strong balance sheets and corporate governance. They have a defensive bias with a third of the fund in consumer staples, and look for companies with conservative debt levels, predictable earnings and steady cash flows. The profile of the fund tends to mean it lags a rising market but comes into its own in downward phases. A true buy and hold for the long term that will be one of the best at preserving your capital.
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by Chris Marshall on Dec 06, 2013 at 13:12