China's bribery crackdown to dampen luxury boom, says First State

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Newly-imposed anti-corruption laws in China will impact luxury brands that have postioned themselves to profit from the country's growing consumer base, according to First State managers Alistair Thompson and Jonathan Asante.

The laws which refer to gifts exchanged between the private and public sector and which came into effect at the beginning of October are expected to impact high-end luxury businesses.

'The government is clamping down on bribery acts that relate to luxury brands. For fine wines, the first growth figures this year have already halved,' said Thompson.

UK-listed luxury retailer Burberry this month confirmed weaker China sales figures, following an earlier warning that full-year profits would end the year lower than market expectations.

Last week, former UBS economist Klaus Wellershoff had the same message, telling delegates at Citywire's Italian retreat: 'Winter looks horrible for Chinese consumers.'

High-end luxury brands will be further hit by slowing growth in China, said Thompson who sees growth likely to remain at 4% for the coming years. Official forecasts from China are currently above 7% for the year.

The First State Asian Growth fund, co-managed by Thompson and Martin Lau had 6.3% in China at the end of September. This compares to the benchmark exposure of 23.2%.

Quality consumers

Asante, speaking alongside Thompson revealed First States's emerging markets team were rather looking to hold quality consumer companies, which most importantly, have pricing power, as an inflation hedge.

Asante's First State Global Emerging Markets Leaders fund, with nearly €4 billion in assets, has more than a third invested in consumer staples. The benchmark weighting in consumer staples is currently 8.5%.

Some of the biggest holdings include Unilever, Tiger Brands and SAMiller.

'The last three years, we've seen increased government involvement. For the next few years we can expect low growth and monetary printing and in this environment, you have to go for companies with pricing power,' said Asante.

Asante said that he had recently sold Hindustan Unilever to see it replaced by its parent company Unilever due to what he termed as the 'GEM growth premium' and a 'too fashionable' holding. He added that he sold the African retailer Shoprite on high valuations.

'We don't see Unilever as richly valued. With private sector companies, we see acceptable returns with will offer some inflation protection.'

Alongside backing high quality consumer companies, Asante said he added the gold mining company Newcrest to the fund.

'We see it as one of the best miners. It has the fastest production growth, lowest production costs, little debt and some of the best management. They are now also one of the few gold miners beginning to pay dividends.'

The First State GEM Leaders fund has returned 45% over the past three years to the end of September. Its benchmark index, the MSCI EM TR, returned 19% over the same period.

The First State Asian Growth fund also returned 45% over the past three years to the end of September. Its benchmark index, the MSCI AC Asia ex Japan TR, returned 23% over the same period.

For a more in-depth interview with First State's Jonathan Asante, see our our sister site; Citywire Money.