AAA-rated Asante: inequality a major threat to global growth

By on

Euro Stars AAA-rated Jonathan Asante believes that inequality and environmental issues remain the biggest geopolitical risks facing both the emerging and developed world. 

First State Global Emerging Markets manager Asante says an inability by governments to deal with their internal problems and poverty in particular, has helped fuel the rise of Al Quaeda's fight with the West, and that China and Japan's islands dispute is a 'symptom of things going wrong in China'. 

He told Citywire Global: 'The war going on between Al Queda and the West is spreading globally and it is a function of inequality and a failure of states to deal with their own issues.'

He also warned that resolving growing environmental concerns was becoming paramount if China was to continue its own rapid development.

‘The big issue for China is the environment. The pollution in Beijing and the reduced water table are huge issues and the government will have to try to solve these problems rather than just focus on achieving 10% GDP growth each year.’

Environmental issues will continue to bite and China has to sort it out or it will mean a lot less growth, but China needs steadier, rather than faster growth.'

In terms of his First State GEM Leaders  fund,  Asante admits that quality global emerging market companies are becoming very expensive as poor quality ones continue to disappoint investors and fall by the wayside.

Asante has been trimming some of his long term favourite quality companies on valuation grounds recently, selling out of Brazilian beverage giant AB InBev which formerly represented almost 4% of the fund, while the quality but more cyclical Taiwan Semiconductor has been reduced from 6% to around 3.5% of the €4.2 billion fund in the past few weeks.

Selling down 'expensive ' quality

Similarly Asante and co-manager Glen Finegan sold out of Unilever Hindustan after a strong run, and reinvested in its UK–listed parent company Unilever to reduce country specific risk in India, while a core stake in South African supermarket brand Shoprite has also been exited.

Overall the fund remains heavily overweight consumer staples, (around 38% of the fund) which tend to provide the strong management, strong cash generation and emerging markets growth potential that Asante seeks.

He told Citywire Global: ‘Consumer staples are great companies because they tend to be more government proof with stable non-cyclical cash flows but many now look very expensive. Across global emerging markets good companies are becoming very expensive. They are highly prized by investors because the more poor quality companies don’t deliver, the more expensive the good ones become as investors flock to them.’

He continues to rate the management team at AB InBev but an expensive current valuation and falling volume growth have led him to sell down the holding.

‘AB InBev has been very successful but beer is not a growth industry and it has got to over 20 times 2013 earnings.

The proceeds were recycled into its South African–listed peer SAB Miller, but Asante says this company is now starting to move towards a full valuation, and he continues to keep a keen eye on whether the growth coming from each holding justifies its current share price.

‘Valuations are down to the quality of the company and the return you want to earn for that quality. For example, when a steadily growing beer company falls below 10% [annual] growth we tend to sell.’

Asante said that with the South African rand weakening in recent weeks, he might consider reintroducing South African supermarket chain Shoprite to the portfolio and while he still likes Taiwan Semiconductor for its number one position in the silicon wafer components market, it faced some potential risks going forward.

‘There is a risk of Intel getting its act together to challenge it and its succession plans are unclear after the founder [Maurice Chang] stepped down.’

Another recent reintroduction to the fund was Japanese sanitary and health group Unicharm. Asante and Finegan like the fact that the group has 50% of its volume sales in emerging markets and is owned by its founder.

‘It is a patient operator on a long term time horizon and it has a strong business in Taiwan and it is now building up in China [where] is competing well against giants such as Proctor & Gamble and Kimberly-Clark. Glen chatted to Kimberley Clark’s chief executive recently who said it was a serious competitor, but it has a market cap of £10 billion making it small and nimble compared to Proctor & Gamble’s £200 billion market cap.’

Selling down telecoms

Asante revisited all of his telecom holdings just before the end of last year and has sold out of most of them on worries over falling revenues, tighter regulation, and the threat posed by new technologies and reducing market share.

‘They are all becoming more mature businesses and are hoping that the advance of technology will keep the [market share] pie from shrinking, but no one really knows. Dividends below 10% won’t protect you if cash flow starts to shrink.’

Asante wants to stick with telcos in countries that have already experienced fierce competition, which has meant the telcos still standing are leaner and more able to withstand further shocks.

‘We like India because it has had cut throat competition for years but we want to avoid telcos in places like the Philippines and South Africa, which have had a smooth ride for the last decade.

Asante believes China is a 'massive opportunity' for emerging market equities managers but admits that selecting the right company is more important than ever as lack of transparency and state interference still remains a key issue and the sheer difficluties faced by Western companies looking to run a franchise in China.

Asante only has around 4% direct exposure to the country, through positions in China Telecom, dairy firm China Mengniu and a recently purchased stake in Chinese ports group China Merchants Holdings, through which he expects to access China’s rebounding economy.

Most of the Chinese mainland exposure in the $4.3 billion fund comes through Taiwanese and Hong Kong positions that he says are essentially proxies for mainland China growth.

‘China is a massive opportunity but we have to find the right companies as we have done in Taiwan which we back as the government is very transparent.’

Over five years to the end of February, the fund has returned 87.6% compared to 35.3% by the MSCI Emerging Markets benchmark.