Emerging markets drive interest in agricultural funds – how to invest?

18th October 2013

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A fledgling middle class coupled with rising urbanisation across the world’s emerging markets is radically changing the face of the global economy and in turn presently some long-term opportunities for the intrepid investor writes Philip Scott.

The current global consumption bill, in other words the amount spent by people on buying goods is estimated to be a gargantuan £23.5 trillion but this figure is forecast to rocket to circa £40 trillion by 2025 – a rise or more than 70%, over just 12 years.

The vast majority of this rise is expected to come from developing nations as incomes rise rapidly, admittedly from a low base, to form almost half of total global spending on goods.

And with the global population anticipated to hit the 9bn mark by 2050, there is ample room for even further spending.

Helping to drive this spending power is the ongoing relocation of emerging market populations, especially across Asia, from rural towns to cities.

For example, greater Jakarta’s population is expanding by 3-4% every year and higher wages in the country are increasing people’s purchasing power. Jakarta has also imposed a 40% hike in its minimum wage this year while pay packets are also rising in other cities throughout Indonesia. Presently consumer spending accounts for a massive two thirds of its economic growth.

Matthew Dobbs of Schroders recently pointed out: “In Thailand, the country’s rural population still makes up 65% of the total, while the agriculture sector only contributes just over 10% to Thai GDP. The urban population is set to continue to grow in the country as consumer spending ramps up. While both Indonesia and the Philippines have higher urban populations, their ratios of around 50% still have a lot of room to grow.”

Ben Yearsley head of investment research at fund broker Charles Stanley Direct says: “When incomes rise rapidly from a subsistence standard of living one of the first things to change is diet. Putting it bluntly, once incomes rise the less wealthy consume much more meat, processed foods and increasingly buy indulgence products, a ‘westernised’ diet where basic food ingredients account for a smaller part of overall cost.”

Funds to play

There are a number of funds available to retail investors tapping into this specific trend. Yearsley’s preferred portfolio is the Sarasin Agrisar fund. While it is not specifically an emerging markets fund it has however almost a third, at 30% of its assets in developing economies, primarily in Asia. Over the past five years it is up by circa 40%.

Despite currently owning only 43 companies in the fund, the manager, Henry Boucher, aims to maintain a good level of diversification, from production through to the consumption end of the spectrum.

Yearsley says: “A good example is fast food chain Yum Brands, owner of KFC. The US firm’s growth is mainly coming from developing nations and increasingly you will find the likes of KFC in Asian high streets.

“Petra Foods, an Indonesian chocolate maker, is another excellent illustration of changing consumption habits. Their cheapest bar, at only $0.05 is only really available to 30m out of a population of 240m.

But as wages rise, the firm could find itself with a potential customer base of 60m. Currently Indonesians consume an average of just 0.3kg per year of branded chocolates versus 8.3kg in the UK, so as incomes rise spending per customer could too.

“This fund is a fascinating way to harness the long-term trend of evolving global diets driven by growth in population and income in emerging markets,” adds Yearsley.

The Allianz RCM Global Agricultural Trends fund is another portfolio focused on worldwide food consumption. The fund has some 58% of its investments in food producers with allocations to alternative energy and food retailers as well. Over the past five years, it is up an impressive 104% over the past five years.

Launched in 2009, the Baring Global Agriculture fund is more focused on the US, where it has more than 50% of its investments. Around 20% of its assets are in the meat, fish and dairy sector while it also has investments in food processing and distribution firms.

The First State Global Agribusiness fund is tapping into the long-term theme of increasing demand and constrained supply of agricultural goods, a trend which is being driven by rising populations, living standards in developing economies and changes to dietary requirements, slowing productivity and decrease in arable land.

 

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