OSK-UOB Asia Consumer Fund is one of the very few funds in Malaysia which offers us exposure to the growing consumer sector in Asia which is expected to thrive for many years to come. The fund is a feeder fund invests at least 95% into United Asia Consumer Fund, a fund managed by UOB Asset Management Limited in Singapore. The main sectors which the fund invests include consumer staples and consumer discretionary companies in Asia ex Japan.
Consumer staples are related to consumer needs such as household products and food & beverages that face inelastic demand. On the other hand, consumer discretionary products which cater to consumer wants will have greater growth in tandem with the growing wealth of the population. In view of this, the fund could have a versatile allocation between growth companies (consumer discretionary) and income & dividend companies (consumer staples) to adapt to different economic conditions.
Let us have a look at the Asia consumer sector:
One of the fastest growing populations:
Asia currently has the largest population in the world at 3.9 billion which account for 60% of the world’s population. Asia is also expected to have the second highest population growth till 2025 after Africa and ahead of other developed nations, according to United Nations database. This could pave way for greater consumer demand amidst larger consumer base.
Increasing wealth to underpin consumer growth:
The rapid economic growth of Asian countries such as China and India has lifted huge number of the population out of poverty especially in rural areas which helped to drive demand for consumer staples. GDP per capita for China and India almost doubled within 6 years and 9 years respectively.
Owing to the rapid rise in GDP per capita, demand for consumer discretionary is also experiencing speedy growth owing to the rapid increases in urban household income. The high net worth individual category has swelled, coupled with rising white collar and service industry jobs which underpin a growing middle class population, demand for consumer discretionary products and luxury products such as cars, mobile phones, electronic items and branded goods are escalating swiftly. Usually, as GDP per capita crosses the US$5,000 threshold, discretionary spending starts to gather pace. Chart below shows retail sales accelerated when China GDP per capita surpassed US$5,000 level.
This bodes well for the consumer sector in Asia as many Asian countries have achieved or are approaching the brink where mass consumption of discretionary goods starts to take off.
Asian countries are experiencing increasing urbanization owing to growing modernization and industrialization with growth rate exceeding that of the developed world. Nonetheless, urban population of Asian countries remains low as compared to the developed world.
Greater urbanization could boost consumer spending on FMCG (Fast moving consumer goods) such as F&B (Food and beverage), tobacco, pharmaceutical goods, toiletries and cosmetics, lifestyle products in addition to telecommunication and internet services.
Furthermore, increasing urban population is boosting demand for public and private transport. Vehicle sales in Asian countries have been rising at an exponential rate, especially in China, India and Indonesia. However, according to International Road Federation (IFR), vehicles per capita in major Asian countries remains low with China, India and Indonesia having approximately 100 vehicles per 1000 population as compared to US, Germany and Japan which have 550 to 750 vehicles per 1000 population.
Increasing working population to support consumer demand growth:
Asia’s working population is expected to rise over the next 20 years, especially in countries like China, India, Vietnam, Indonesia and Philippines which have a huge young population as compared to more developed countries. This could support continuous growth in consumer demand in Asia as more people are becoming economically productive in the coming years.
Asia consumer equities outperformed the broader Asian equities:
Over the past 10 years, consumer equities far outperformed the broader Asian equity funds as the consumer sector has some of the fastest growing companies in Asia. MSCI Asia ex Japan Consumer Discretionary Index and MSCI Asia ex Japan Consumer Staples Index far outperformed the general MSCI Asia ex Japan Index for the past 10 years by 54.4 percentage points and 114.2 percentage points respectively. This outperformance could continue based on the reasons stated above. This will benefit OSK-UOB Asia Consumer Fund which is well-positioned to benefit from the thriving consumer sector.
Capturing the best of both sectors:
Owing to the fund’s allocation into consumer discretionary and consumer staples sectors, the fund has a dynamic sector allocation which has the flexibility to allocate between growth companies (Consumer discretionary) or dividend and income companies (Consumer staples) depending on the economic conditions. On one hand, consumer discretionary stocks present greater growth opportunities in the event of a booming economy. On the other hand, consumer staples stocks could partially hedge the downside of consumer discretionary stocks as consumers limit spending on unnecessary items during an economic decline.
Underlying investments attractive:
As at 26 Feb 2010, about 73% of the capital is invested into consumer sector, with the remaining portion allocated to information technology, healthcare, industrials and telecommunication sectors. Investments are more skewed towards China/Hong Kong at the moment which account for about 70% of total investments. Furthermore, most of the stocks held by the fund are trading below PE of 15X with many of them in their single digit. The valuations are considered very attractive as most of the companies expect earnings growth of more than 20% in 2010.
Low risk to downside of Asia consumer sector:
Despite the severe economic downturn, many companies held by the fund managed to deliver 30%-40% earnings growth. Barring any major collapse in growth rates in China or India, which I think it is unlikely to happen, consumer demand will continue to be strong. This will further be supported by favourable policies set by the governments to encourage domestic consumption such as subsidies for purchase of cars, houses and electrical appliances in China and reduction of value added tax in India. Consequently, risk to the consumer sector in Asia remains low.
Experienced investment team; Manager of a top performing fund in Malaysia:
The fund is currently managed by Paul Ho, an experienced manager who also manages OSK-UOB Asian Growth Opportunities Fund which was the top performing fund in Malaysia last year. He is well supported by a team of 13 in Singapore alone which covers Asian equities. This is in addition to the resources available from the entire UOB Asset Management network which has presence in Malaysia and Thailand coupled with UOB’s partners in China, India and Korea such as Ping An Insurance, UTI in India and Hyundai Investment Group in Korea.
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