It used to be so easy to invest in the Asian consumer space. Just buy a decent company, wait for a billion customers to get rich enough to buy their stuff, and see the share price rise. Well, not anymore. At least that's the conclusion I drew from a recent report by BNP Paribas.
Over the next decade, the Asian middle class will welcome an additional one billion consumers, and more than 50% of the world's megacities will be located in the region, making lifestyle and convenience the main areas of competition.
There's a race underway to capture the fabled high-spending Asian consumer. On one side, you'll find foreign multinationals tweaking their products towards local palates. On the other, you'll have local companies expanding regionally and globally with products that can meet the needs of discerning foreigners.
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Today, I want to show you how we're going to navigate the shift in Asia's consumer sector. The increased competition will create winners and losers, but if we can get it right, the returns should be salivating.
Asian companies aren't surrendering without a fight
Afterwards, I began to notice an increasing number of signs, both big and small. Another company was spending a lot of money rebranding its fish sauce, an essential ingredient for many famous dishes.
Meanwhile, a local Asian coffee chain said it was adjusting its growth strategy in two major ways. Firstly, it was shrinking the average outlet size by more than 50% (kiosks) in order to tap into the market of fast-moving young professionals. Secondly, it was widening its sales channels by selling its coffee sachets and merchandise on consumer websites.
This is coming from a company that started as a small caf in the suburbs of a capital, where the proprietor and his extended family served local coffee and inexpensive food.
The good news is that Asian consumer companies appear ready for the fight. While Forbes' 100 most innovative companies list is topped by US technology and internet firms, the consumer space consists of about 20% Asian companies, a sector led by food and beverage companies.
What's more, while multinationals still dominate the space, they mostly employ local workers. That means there's talent ready to be deployed when the processes and compensation in local companies improve.
Four ways to play it
Asian funds. Sorry to say, but most of them tend to be closed index funds, meaning they are stuffed with big, boring stocks and management teams that are unsuited to innovation. The proportion of 'active shares' is often low.
Indeed recently, Swedish investors launched a lawsuit against some funds that failed to provide active management.
Asian consumer funds. Some of them are OK, though I find them stuffed with listed subsidiaries of Western multinationals and big Asian stocks trading on swindling multiples. Also, they tend to have too narrow a definition of what a 'consumer' is, excluding property, banks, and telecoms operating in economies going through hockey stick curves.
Why should we exclude banks offering micro lending in Indonesia? Or Vietnamese property companies selling low-cost houses below $50,000?
Multinationals listed in London or other developed markets. The snag here is that exposure to emerging markets tends to be small; therefore, growth prospects are still dependent on fickle Western consumers.
Single stocks. These are an appealing option. BNP Paribas has compiled a list of seven top consumer stocks: CP All (Thailand), Jubilant Foodworks (India), Titan Co (India), Biostime International (Hong Kong), PCSC (Taiwan), Unilever Indonesia (Indonesia) and Unicharm Corp (Japan).
The BNP list is a good start, but I could add at least a dozen other names. The latter group consists mostly of small caps, which are less researched, trade at low valuations and offer the opportunity to become multi-baggers over time.
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