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10 minutes with…Peter Kirkman

JP Morgan launched its global consumer trends fund in 2008, with a basic philosophy that markets are slow to recognise, and traditionally under-estimate, structural change.

According to manager Peter Kirkman, global consumption is worth a total of £20trn and patterns within this change, with current generations spending much more than their parents on healthcare, for example. He therefore sees consumption as an effective leading indicator of global change, representing a massive 50 per cent of gross domestic product.

Kirkman’s investment process is based around the ongoing shift from developed to emerging market consumerism, with three micro pillars beneath that – demographics and urbanisation, aspiration and health and wellness.

“Because the fund is a global mandate, we can invest in these underlying themes in different ways,” he says.

“Chinese consumerism is a key driver and we have played it directly through sporting goods manufacturer Li Ning and indirectly via Yum Brands. The latter owns KFC and Pizza Hut, which are both growing strongly in China.”

Kirkman says taking advantage of global arbitrage is a key facet of the fund, focusing on underlying trends but accessing these through the best-priced markets.

“Global consumer trends is not just an emerging market product and will reallocate capital to find the cheapest exposure to our key themes.”

Overall, the manager sees a neutral geographical asset allocation as roughly one-third each in the US, Europe and Asia/emerging markets.

From launch, the fund had fairly low direct exposure to emerging markets during a bubble period for the region, taking large positions in Western markets.

When emerging markets had halved by early 2009, Kirkman bought back in, buying local names as well as stocks with emerging market exposure such as Louis Vuitton, which proved a big driver of performance driver.

“Emerging market consumption had once again become an expensive theme to play directly so we bought exposure via cheaper European stocks.

“Our direct emerging exposure got as low as 20 per cent in the fourth quarter last year but we bought back in aggressively as the region sold off, increasing the position to 35 per cent. Inflation fears have driven up equity risk premiums and volatility will continue as investors veer between optimism and pessimism, meaning we can buy stocks at a discount.”

Another key position in the fund is healthcare, as Kirkman cites an ongoing shift in pharmaceutical spending away from the current US skew.

Over the portfolio’s three years, the team has made money from owning big aspirational brands, such as Louis Vuitton, which is another reason Kirkman strains against accusations of an emerging market bias.

“Most of the intellectual capital and brand value in the world still lies with Western companies and these names will benefit most from the consumer growth in the East. You need a considerable position in Western businesses to benefit fully from the consumer theme,” he says.

Other performance drivers have been local Chinese names as well as healthcare plays, where the team has benefited from a re-rating as the market comes to understand the value of research and development.

Overall, of the fund’s 30 per cent alpha generated since launch, more than 30 individual names have contributed 50 basis points or more.

With inflation an increasingly pervasive fear, particularly in emerging markets, Kirkman says this underlines his central thesis of a shift in consumption from West to East.

“We see fears as overplayed because much of the rise will come from Chinese wage price inflation, which will ultimately be good for consumption.

“Concerns mean many Chinese companies are trading at 30 to 50 per cent discounts.”

For Kirkman, wage inflation in China has come as excess labour has dried up and government policy focuses on improved living standards.

“This has meant inflation of 3 to 5 per cent but with wages increasing at 15 per cent, that leaves at least 10 per cent room to bring about a real increase in living standards.

“If you compare this with the West, there is little sign of any wage price inflation so living standards will likely fall, accelerating the East-West shift.”


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