View the article online at http://citywire.co.uk/money/article/a583339
Investors 'underestimate' emerging market consumer power
The growing spending power of emerging market consumers is leading fund managers Jan Luthman and Stephen Bailey to buy more consumer-facing stocks.
The growing spending power of emerging market consumers continues to be underestimated, say CF Walker Crips Equity Income 's fund managers Jan Luthman and Stephen Bailey, and on this basis they're buying more consumer-facing stocks.
The duo already have sizable holdings in Unilever (ULVR.L), which makes up 4.8% of the fund, and Reckitt Benckiser (RB.L) (4.6%) in their £350 million fund, which features in Citywire Selection, and they've recently added 1.3% and 1% stakes respectively in US-listed pair Heinz and tissue paper maker Kimberley-Clark.
'We have become more positive on consumer spending in China and the Far East, and believe that the market is underestimating the growth in spending power. In the West, we are depreciating our currencies, while in the East there is wage appreciation,' Luthman said.
'We are very happy long-term holders of large multinationals that are selling into emerging markets.The Chinese have increased spending power at a time when our currency is being pushed down and the [Chinese authorities] are allowing their minimum wages to be raised.'
Pharmaceuticals set to soar
Elsewhere Luthman and Bailey are maintaining their significant overweight compared with their rivals in the same investment sector to pharmaceutical stocks. They recently added a 3% fund stake in US stock Bristol Myers Squibb to existing holdings in Pfizer and Shire (SHP.L), and GlaxoSmithKline (GSK.L) and AstraZeneca (AZN.L) are both top-10 holdings, contributing 4.8% and 2.7% respectively.
Luthman believes the market still views pharmaceutical stocks similarly to how tobacco stocks were viewed seven or eight years ago, namely facing regulatory risks and having limited pricing power. He continues to think the market is only at the very start of a positive reappraisal for the sector.
'It has hardly begun yet, but we think we are in the early stages of a rerating. The market vews Glaxo like tobacco stocks seven years ago, but we see a major shift away from primary care and not just in Asia,' he said.
'The growth in lifestyle, over the counter (OTC) and generic drugs point to what we believe is underestimated potential for pharma companies to increase their pricing power.'
The growing trend for governments to intevene and help fund the production of new drugs is also taking much of the risk out of the investment case, Luthman said.
'People can afford better access to medicines, and on the research side we are seeing the emergence of partnering by the UK and US governments into early-stage research. It takes on average 13 years to bring a drug to market and 95% fail, so we expect this process to take significant risk out of early-stage drugs.'
Still backing tobacco
Elsewhere, Luthman is continuing to shun banks because of sovereign debt worries, but is keeping his overweight to tobacco, with both Imperial Tobacco (IMT.L) and British American Tobacco (BATS.L) long-term top-10 holdings.
'Like pharma, tobacco has very secure income streams and good pricing power. In emerging markets there is also the potential to push consumers upmarket to more premium brands as spending power grows. There is regulatory risk in the Far East as governments wake up to the damage smoking does, but it is such a popular pastime and is a huge revenue earner,' he said.
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- Unilever PLC (ULVR.L)
- Reckitt Benckiser Group PLC (RB.L)
- Shire PLC (SHP.L)
- GlaxoSmithkline PLC (GSK.L)
- AstraZeneca PLC (AZN.L)
- Imperial Tobacco Group PLC (IMT.L)
- British American Tobacco PLC (BATS.L)
- Fenner PLC (FENR.L)
- Anglo Pacific Group PLC (APF.L)
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