A UK funds manager has had to go back to square one in order to work out how to get the most out of emerging markets.
“A lot of people are focusing on the benchmarks, and the benchmarks will lead you to the success stories of yesterday,” according to Tassos Stassopoulos, a portfolio manager at AllianceBernstein.
“This theme is so obvious, the tailwind is so strong, that it’s hard not to make money on this theme,” he said at a briefing this week in Sydney.
“Even buying an ETF (exchange trade fund) exposed to the emerging consumer should make you money.”
But investors are still missing opportunities if they go down the traditional pathways which identify businesses that have already had their successes, rather than those with their futures ahead of them.
“Similarly, if you use the purely bottom-up analyst approach, where they go around the emerging markets trying to find the stocks on a bottom-up basis, what you find is that they are missing big areas of growth and at the same time they miss all the developed market stocks.”
Mr Stassopoulos said his firm’s research revealed a consistent trend around the world, in part although the simple approach of going into local stores and photographing the merchandise on the shelves.
They found that typically about half the stock was produced by global brands – not traded in the local share market – while another 30 per cent was provided by privately held local businesses.
As a result, investing in local stocks exposed to emerging market consumers limited the investment possibilities to only 20 per cent of the market, he said.
The idea that exposure to EM’s was best achieved though investment in locally listed stocks was one of a number of myths the research revealed.
But knowing which businesses are about to take off is “very, very difficult to do” and required research to be structured much differently than it might normally have been.
Once the most likely areas of growth are identified using top down approach, AllianceBernstein focuses on “grassroots research”.
“You basically meet consumers in their homes, understand their hopes, dreams and aspirations, debunk myths, gains insights.”
Once that’s done, bottom up research can be done on likely candidates for investment, and a portfolio structured using expected returns and estimates of risk.
It’s easy to say, but in practice it can be quite a wrench for analysts, involving two major shifts in their analytical framework, Mr Stassopoulos said.
“The first is that the consumer demand will drive the long term trend, not the company.”
The second, he said, was not to try to outsmart competitor funds managers, but to identify long term trends and try to forecast them.
“Now to get through these two shifts, you have to pretend you’re a new company that’s going to enter these markets.”
