Saturday, August 14, 2010
Emerging-market consumer stocks are posting the only gains among 20 industry groups since MSCI Inc.’s gauge of global shares peaked in April as investors bet shoppers from Moscow to Sao Paulo will provide a haven amid signs the global recovery is faltering.
The MSCI Emerging Markets Consumer Staples Index rose 2 percent and the MSCI Emerging Markets Consumer Discretionary Index gained 1.2 percent since April 15, leaving both measures within 5 percent of their all-time highs. Every other emerging and developed-nation industry group fell, led by a 15 percent drop in the MSCI World Information Technology Index.
While the MSCI All-Country World Index has slid 11 percent from this year’s peak on stagnant U.S. jobs growth and spending cuts by European governments, retail sales are surging at an 18 percent pace in China, 11 percent in Brazil and 5 percent in Russia. The gains sent Russian grocer OAO Magnit to the highest ever price-earnings ratio relative to London-based J. Sainsbury Plc and lifted Brazilian fashion retailer Lojas Renner SA to its most expensive level compared with San Francisco-based Gap Inc.
“People are willing to buy these sectors even though they have some concerns on valuations,” said Gareth Morgan, a London-based emerging markets money manager at F&C Asset Management Plc, which oversees about $156 billion worldwide. “You’re looking for stocks and sectors with a higher degree of certainty and some of these consumer stocks fit the bill.”
Investors are counting on rising incomes in developing nations to boost demand for everything from food and cigarettes to designer shoes and cars even as increased saving rates in the developed world pare spending.
Emerging nations will account for 93 percent of the global “middle class” by 2030 -- up from 56 percent in 2000 -- and half of a projected 800 million new middle-income consumers will come from India and China, according to Citigroup Inc.
Developing countries will expand 6.4 percent as a group next year, almost three times faster than the 2.4 percent growth in advanced economies, according to International Monetary Fund estimates. Retail sales will climb an average 7.5 percent in 12 major emerging markets during 2011, compared with 2 percent growth in advanced countries, forecasts by research and consulting firm Euromonitor International show.
The savings rate in the U.S. reached the highest level in almost 18 years in June, climbing to 6.4 percent, the Commerce Department said on Aug. 3.
Growing Middle Class
The MSCI AC World index has retreated 4.1 percent this week after the Federal Reserve said the economic recovery is weakening and U.S. initial jobless claims unexpectedly climbed. The emerging consumer staples index of food, beverage and household products companies lost 1.6 percent during the period, while the discretionary gauge of clothing retailers, real-estate companies and automakers lost 3.1 percent.
“Valuations are not cheap anymore, so we may see some profit-taking here and there,” said Ivo Kovachev, a senior emerging markets money manager in London at JO Hambro Capital Management Ltd., which oversees about $6.3 billion including shares of Krasnodar-based Magnit. “But the long-term story is still there. The emergence of the middle class is the main driver.”
Emerging-market fund managers had their top “overweight” positions in consumer stocks last month, according to a survey by Bank of America Corp.
Investors are bullish even after the companies failed to post the best returns during six global equity retreats tracked by Bloomberg since MSCI’s industry indexes began in 1995. When the MSCI AC World Index tumbled 60 percent through March 2009, both the emerging-market consumer staples index and the consumer discretionary index sank more than their developed-world counterparts.
Should the global economy slip back into recession, even developing-nation consumer stocks may not be a haven, said Deborah Medenica, the global head of emerging-market equities at PineBridge Investments LLC, which has about $90 billion under management in New York.
“What this downturn has shown is that market correlations are high,” Medenica said. “If there’s a fear of double dip re- emerging no one is safe from that.”
Magnit, which operates a chain of discount supermarkets in Russia, is trading at 31 times per-share earnings during the past 12 months, almost triple the ratio of 11 at U.K. grocer Sainsbury, according to monthly data compiled by Bloomberg. Renner of Porto Alegre, Brazil’s biggest publicly traded clothing retailer, has a price-earnings ratio of 26, compared with 10.3 for Gap, the operator of Old Navy and Banana Republic clothing chains. The 152 percent premium is near the record 162 percent reached on July 30, data compiled by Bloomberg show.
India’s ITC Ltd., a Kolkata-based producer of cigarettes and snack foods, is trading at 25 times analysts’ estimates for next year’s earnings, near the highest since Bloomberg began compiling the data in May 2009. Belle International Holdings Ltd., a Hong Kong-based seller of women’s shoes, is valued at 30 times profit estimates, the highest since its May 2007 initial public offering, data compiled by Bloomberg show.
“We’re seeing favorite opportunities specifically in China because the government is steadily shifting from an export society to a domestic society,” said Audrey Kaplan, who helps oversee $337 billion as a New York-based money manager at Federated Investors Inc. The Federated Intercontinental Fund held 1.7 million shares of Belle as of June 30, according to data compiled by Bloomberg.
Chinese retailers are benefiting from increased spending by the nation’s 1.3 billion people as the economy expands at an annual rate near 10 percent. Belle may boost earnings before interest, taxes, depreciation and amortization at a 19 percent pace over the next two years, more than double the rate of global peers, according to analysts’ estimates compiled by Bloomberg.
Magnit’s earnings are forecast to climb at a 30 percent pace next year and 26 percent in 2012, analysts’ estimates compiled by Bloomberg show. Renner’s long-term growth rate is estimated at 23 percent, while ITC may increase earnings at a 12 percent annual pace, according to analysts’ estimates.
ITC shares have climbed 21 percent in Mumbai trading since April 15, while Renner has gained 31 percent in Sao Paulo, Belle is up 20 percent in Hong Kong and Magnit’s London-listed shares have gained 13 percent.
JO Hambro’s Kovachev says rising incomes in emerging markets are boosting companies outside MSCI’s consumer indexes. He cited Ankara-based Turk Traktor & Ziraat Makineleri AS, which surged 8 percent yesterday after saying second-quarter profit more than tripled. The tractor maker is benefiting from higher spending by farmers, Kovachev said.
Turk Traktor shares are valued at 8.3 times earnings, less than half the ratio of 18 for MSCI’s global consumer discretionary index, data compiled by Bloomberg show.
“People are more confident in the domestic growth in emerging markets,” said Greg Lesko, the head of emerging-market equity at Deltec Asset Management in New York, which oversees $750 million. “If you can find companies that are uniquely taking advantage of this growth it’s an opportunity.”