The growing middle class in Asia will continue to deliver investment opportunities as the adoption of technology and greater innovation by consumer-focused companies unlocks the potential in markets, according to managers at Baillie Gifford.
Ewan Markson-Brown, lead manager of the £138.1m Pacific Horizon trust, said an expanding middle class in Asia will contribute to changing consumption trends in the coming years.
“Asia will be the largest growing consumer market for 15 years,” he said. “As income changes we will see quite dramatic shifts.”
The manager highlighted three countries from the region with different consumption opportunities for investors: China, Vietnam and India.
Roderick Snell, deputy manager of the trust, said: “China is the best consumption market you can invest in globally. The big question is what is moving consumer growth.”
He added: “I think the growing consumption story is driven by technology and innovation and there are plenty of companies starting to emerge.”
Snell said technology and innovation were the biggest drivers of consumption growth in China, with the world’s largest e-commerce market, valued at $606bn in 2015, “twice the size of the US and seven times the size of the UK”; he added that the market is forecast to grow to $1.2trn by 2018.
The manager highlighted the rapid adoption of private car hire app Uber as an example of increased innovation and adoption of technology.
“China adopted Uber far more rapidly than other countries and has far more users,” he said.
Performance of FTSE China A 600 – Technology over 3yrs
Source: FE Analytics
Snell highlighted other companies that had benefited from the active e-commerce market in China such as top 10 holdings online marketplace Alibaba and internet giant Tencent, adding that Baillie Gifford valuations of these companies continue to make the stocks seem attractive.
Elsewhere in the region, the managers highlighted Vietnam as one of the best structural consumption opportunities for investors.
Markson-Brown said: “Vietnam is one of the newest economies in emerging Asia. It’s stock market only emerged in 2000… [and the economy is] slowly opening up.”
Its proximity to China and the growing consumption trends in the region means Vietnam is well-positioned as a centre of manufacturing. The manager said demographics in the country supported the investment case for the country, noting the young, educated and cheap workforce.
He said: “Companies in Asia have been investing heavily in Vietnam and believe it can manufacture cheaper and better than other Asian countries.”
Indeed, Markson-Brown said Vietnam has been able to grow its export industry by 6 per cent per annum, which in turn has fuelled domestic consumption, adding: “Where exports go, domestic consumption follows.”
With regulations restricting investment in Vietnam, the manager accesses the market through listed fund Dragon Capital Vietnam Enterprise Investments, a 2.8 per cent weighting in the portfolio.
Performance of fund over 1yr
Source: FE Analytics
Markson-Brown said all the companies held by the specialist fund are targeted at the rising consumer class. Over one year the fund’s share price has risen by 32.98 per cent.
Finally, in India, the managers have identified a reforming consumer giant. Markson-Brown noted that India’s share of the global economy was not only smaller than developed markets but also regional rival China.
The manager said under prime minister Narendra Modi, moves were being made to modernise the economy and promote growth.
Markson-Brown noted the growing importance of technology networks in the country than have begun to change the way Indian people interact with others and consume goods and services.
“With just a mobile phone and a fingerprint, you can now open a bank account,” the manager said. “There is no filling in forms.”
He said mobile payment technology could see a surge in the number of online transactions and a move away from traditional methods of payment.
The Pacific Horizon trust was launched in 1989 and invests in Asia-Pacific ex Japan and Indian sub-continent for capital growth. Markson-Brown has managed the trust since 2014, after joining the firm in 2013 from asset manager PIMCO.
The closed-end fund has delivered a 48.15 per cent gain over three years, underperforming the 50.01 per cent return for the average IT Asia Pacific ex Japan Equities trust and a rise of 51.57 per cent in the MSCI AC Asia ex Japan benchmark.
Performance of trust vs sector & benchmark over 3yrs
Source: FE Analytics
Over the past year, however, the trust is up by 52.86 per cent compared with the average peer’s 44.41 per cent gain and a 44.4 per cent return for the benchmark.
The trust is 6 per cent geared and is currently trading at a 9.9 per cent discount, according to data from the Association of Investment Companies. The trust has an ongoing charge figure (OCF) of 1.13 per cent.