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GEM fund managers shift focus within domestic consumption theme

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As investor attention focuses on China’s economic policy, managers are shifting their focus within the domestic consumption story away from the more direct plays in consumer staples and discretionary and into IT and telecoms, says S&P Capital IQ Fund Research in its latest sector trends paper.

“This shift has continued into 2012, with a large percentage of managers continuing to hold sizeable allocations to internet-related stocks such as web-based search engine Baidu and online gaming and social networking company Tencent,” says John Monaghan, S&P Capital IQ fund analyst.
 
Another area of interest is the growing smartphone market that provides opportunities within both operators and chip and component makers. However, some managers such as Mike Shiao at Invesco remain unconvinced on operators and is zero-weighted in the space. His preference within his Greater China Equity Fund is for Taiwanese chip- and unit-makers such as HTC and Hon Hai Precision.
 
Other areas of domestic consumption attract interest in Latin America. For example, José Luis Garcia, who manages MFS Meridian Funds – Latin American Equity Fund is focusing on further education and healthcare. Given Brazil’s size, he favours companies providing distance-learning services, particularly to the more rural areas, and those with a greater variety of courses as the longer-term winners. Conversely, he is light in materials names on the back of slowing Chinese demand.
 
Meanwhile, Eastern Europe funds have struggled to attract investors as a result of the continuing eurozone debt crisis. This investor shift is reflected in the level of outflows experienced by a number of managers. In some cases, this has resulted in the closure of funds. What has further hurt returns is that in a risk-off environment there has been a clear preference for higher-quality companies with earnings certainty and sound management teams. Corporate governance has always been an issue for several participants in the region and this is another reason why investors have been reducing exposure.
 

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