Fancy consumers? Go for emerging market exposure

FRANKFURT Fri Oct 22, 2010 11:15am BST

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FRANKFURT (Reuters) - Emerging markets are the key for consumer stocks and investors should go for established names with high exposure in these economies rather than buying into local players, a fund manager at ING said.

"I like to play the emerging markets through the multinationals," Huub van der Riet, manager of the ING (L) Invest Food & Beverages, told Reuters.

Top holdings of the fund include Nestle (NESN.VX), the world's biggest food group; Procter & Gamble (PG.N), the world's biggest household maker; soft drink and snacks maker PepsiCo Inc (PEP.N); and Wal-Mart (WMT.N), the world's largest retailer.

Sluggish demand in the United States and Europe has pushed retailers and food makers to look for growth abroad, with European food groups expected to report slower third-quarter sales growth as they raise prices to offset increases in commodity costs.

Nestle on Friday confirmed its full-year targets after posting strong underlying sales growh in the third-quarter, partly boosted by buoyant demand in emerging markets.

Facing increased competition from lower-priced stores attracting those hit hardest by a weak economy, Wal-Mart now also makes about a quarter of its business in its International unit.

Nestle and Wal-Mart have gained 5.7 percent and 1.1 percent so far this year, respectively, underperforming a 7.4 percent rise in the MSCI World Consumer Staples Index. Riet's fund was up 4.7 percent by end-September.

"I struggle with valuations for emerging market retailers since everyone is going for those (...) at the moment. At the same time valuations of supermarket retailers in the U.S. and Europe have suffered but look cheap now."

Danone (DANO.PA) on Thursday reported higher-than-expected third-quarter sales but cautioned that economic and social crises would dampen consumption on the continent for some time.

Riet cautioned that the focus on emerging markets should not be overestimated, since most of the business was still happening in cash-rich developed countries.

"For big retailers in the developed world, the home market is still the cash cow and the emerging markets are the growth opportunity," said van der Riet, whose fund has a volume of about 64 million euros (57 million pounds).

(Editing by Michael Shields)