In Asia, a growing middle class, changing consumption patterns arising from the new Asian wealth, and changing social behaviour enlarging disposable income have combined to boost consumer spending and create many investment opportunities.
While the rest of the world either stagnates or contracts, growth in Asia continues to accelerate. Invesco’s Asian Consumer Demand Fund, launched on March 25, aims to tap into this increased Asian consumer activity, and at its helm is William Yuen. Excerpts from an interview:
Invesco already has nine funds investing in Asia. Why another?
We would like to offer our investors the “choice” of participating in the exciting growth outlook of the Asia region depending on their investment objective and risk tolerance levels. Within the product offering there are broad-based regional funds, sub-regional funds, country-specific funds, thematic funds and more conservative balanced funds. Each of the Asia-related products will be different to each other and will offer exposure to the fast growing Asia region through very different channels. So, in a way, the choice is there for our many investors.
We have been offering new products that are tied specifically to investible Asian themes such as Asian infrastructure and now Asian consumer demand, as we firmly believe we are only at the beginning of each of these unique secular trends.
What is different about this fund?
The Invesco Asia Consumer Demand Fund specifically targets the dramatic rise of the three billion Asian consumers living in the Asia (excluding Japan) region and how such Asian companies can benefit from this fast moving reality.
The difference of this fund is that we look to invest in Asian companies that directly deal with the end consumers through either goods or services. We invest in Asian consumer demand related companies that don’t depend on global growth conditions, which are weakening fast, and the financially stretched global consumers.
Instead, we are riding on a fast growing Asian economic region, where not only are government finances strong (which can provide more stimulus to the already strong consumer spending trends), but Asian corporate and Asian consumers are equally powerful and strong. Asian consumers have been saving too much and borrowing too little relative to their income earning capabilities. Even at such an early stage of the uptrend, we expect the Asian consumers will be contributing close to $3 trillion (Dh11trn) to the Asian economies.
What exactly are the investment themes of the consumer demand fund?
We take a broad definition in what is considered stocks that will benefit from the booming Asia consumer demand trend. We take the view that any consumers, such as you and I, with direct access to either through goods or services on a regular basis are investment candidates. This will stretch from the day-to-day necessities such as food, to discretionary spending such as cars, fashion, electronics and all the way up to lifestyle needs such as healthcare and leisure.
In addition, we will focus on financial services companies that will enhance, protect and prolong not only current spending of Asian consumers, but future spending as well. The selection is there, as we join the rise in purchasing power from the three billion Asian consumers. We are looking at three distinct themes.
First is the rise of the China consumer. Consumer spending in China is growing alongside rising income levels from better job prospects from the sustainable economic growth. The middle-income group is on the rise and the shift away from necessity spending to discretionary lifestyle spending is propelling a new wave of consumer spending. Equally, the current generation is spending on things that the previous generation has only dreamed of.
Second is the Indian wireless services. Penetration is still low at around 20 per cent – or 200 million subscribers – as at the end of 2007 relative to the world and China. Assuming India can reach the level we are seeing in China as at the end of 2007 – around 40 per cent penetration – there will be an addition of more than 200 million subscribers.
The third is financial services in Asia. Similar to many products and services targeting Asian consumers, the adoption rate of financial services is generally low relative to the developed world. Asian consumers are saving too much and borrowing too little relative to their income earning capabilities – potential will be there for a consumer to enhance consumer spending through credit. Also, insurance services are a new concept to the majority of Asian consumers – the potential to protect their assets. Finally, the introduction to wealth management services and brokerage services will prolong their spending well into the future.
Other themes that can be applied across Asia are: travel and leisure, healthcare services and specific educational services.
What is your approach to selecting companies? Do you rely on local expertise or does your team make visits to selected companies?
The portfolio will be constructed by applying a rigorous bottom-up stock selection process. We don’t have country constraints or sector constraints; we don’t aim to replicate any benchmarks – although we have a reference benchmark, the MSCI AC Asia-Pacific ex Japan index, for monitoring and risk management purposes.
Top-down outlook will also be observed, but as a way of complementing our focus on bottom-up stock selection. We will typically look for firms that exhibit characteristics such as EPS growth that is higher than the reference benchmark, strong balance sheet, industry-leading business franchise and superior management. In selecting Asian consumer demand related companies, we will use the investment professionals based in our Hong Kong office to complement the two fund managers of the Asia Consumer Demand Fund.
Each of the investment professionals will have specific Asia country coverage that we can tap into and analyse industry trends and specific fundamentals of the companies. Ultimately, the lead fund manager, me, and co-manager Samantha Ho, will find the best consumer demand stocks for the fund.
A strong part of our investment process is our strong belief in visiting and meeting companies on a regular basis.
Through the 13-plus investment professionals, we will make regular visits to our targeted companies to get an in-depth understanding of what is happening to the company on the ground.
We will also make visits to the markets and end-points that these companies target within the Asia region.
We want to ensure the end-customers these consumer demand companies are targeting are a worthwhile in an investment sense. Finally, we believe strong fundamentals will drive share price performances.
What is the outlook for Asia, and which sectors of the economy will continue to grow irrespective of the economic slowdown in the United States?
Despite negative headwinds arising from the US economy, we feel Asia is relatively more resilient and will continue to offer growth higher than many developed countries. Asian economies are generally fast growing, government finances are in good shape; together with healthy Asian corporate and consumers, the outlook remains bright.
We feel sectors that are driven by domestic demand, and not global economic conditions, are the best way to mitigate the impact of a US economic slowdown. Asia Infrastructure and Asia Consumer Demand sectors are the most obvious choices that are predominantly driven by the strong domestic economic conditions.
How will the slide in the US dollar affect earnings and growth?
The general slide in the US dollar is more of a function of the weakening fundamentals of the US economy and the expectation of easing of US monetary policy. Against this backdrop it is generally perceived to be mildly positive for the Asia region, as the easing environment and weakening dollar will add liquidity to the region, at a time when Asian fundamentals are strong.
There will be a different impact to Asian earnings as a result of the weakening of the dollar, but we don’t see it as any major driver, either way. A strengthening Asian currency against the dollar will have a positive impact on a consumer.
What is your take on the recent gyrations in the Asian stock markets? If the US sneezes will Asian markets catch a cold?
Unfortunately, Asian stock markets still take clues from the direction of the US stock markets, despite the very clear positive trend that Asian economies, corporate and consumers are all in far better shape than their counterparts in the United States.
The recent correction seen in the Asian markets have meant that, while fundamentals remain firm, Asian stocks are trading at much more attractive levels on a valuation basis. In particular, the consumer demand related companies continue to exhibit strong earnings growth potentials that are more than two times the average of the Asia-Pacific region.
Most of these companies depend on our own three billion Asian consumers.
PROFILE: William Yuen, Head of Invesco’s Asian Consumer Demand Fund
Yuen has an overall investment expertise of eight years. He is on the Asian investment team of Invesco.
Yuen is based in Hong Kong and has bachelor’s degree in Economics from the University of Sydney, Australia. He also holds a Master of Commerce degree from the same university and is a Chartered Financial Analyst.
