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"Chinese retail sales increased 23% in September". "Chinese copper imports up 21% month on month". You probably wouldn't have read about this over recent months with many headlines leading us to believe the world is on its way to meltdown.
But Citywire A-rated Graham French points to this still-robust demand and is aiming to take advantage of it in his M&G Global Basics fund.
Amid the global turmoil, French has stuck to his three to five year approach of investing and steered clear of paper assets. With massive deleveraging occurring in the system, he thinks that headlines are influencing people's minds and making them look at the short term. He puts the blame for the market's current predicament at the feet of hedge funds, regulators and derivatives.
'Governments and regulators were happy to take a back seat and stand by the financial community. But the root cause of what’s occurring is the unwinding of hedge funds and derivate land which we predicted eight years ago. So many people have been let down, didn’t know what they held and are suffering,' he says.
French maintains that there is a long term growth story in Russia, China, Asia, India, Middle East and Latin America where the change in demographics means 3 billion people will be accesssing basic products such as soap, shampoo and pizzas. He believes that the market has forgotten this.
Speaking on a conference call to investors he continued his vehement attack on hedge funds.
'When acute panic selling stops, we will finally get to the end of the deleveraging of a beast [hedge funds] that’s been out of control for a number of years. Then we can return to the fact that we have growth in those parts of the world' he says.
Last week we wrote that the fund's exposure to basic materials was reduced from 40% at the end of May to less than 25%. Overall $1 billion worth of equities have been sold and reinvested. The main beneficiary has been consumer goods that are still relying on demand from the 3 billion people. International sales growth of 11% from McDonalds, Procter and Gamble (8%) and Coca Cola (8%) show that there is still increasing global growth for his holdings.
'Our thesis is that the world will move away from the US and the West and into these countries. You can only see that if you step away from the market. There is currently lots of short term noise and panic with many people just wanting to survive. That creates a herd mentality which doesn't look at the long term' he says.
French is proud of the shift that has been made in the fund. Although he admits that losses have made, they would have been much worse if he had sayed in fertilisers, basic materials and oil and gas. 'When you sell a glamorous fertiliser stock such as K+S it’s hard to do. But the shares are down 80% since we sold. We’re not forced sellers and there hasn't been many redemptions in the fund so we can pick up bargains,' he says.
He thinks that the fall in oil prices and commodities will benefit his holdings that have now seen their costs base halved with demand remaining robust. 'At a macro level it has a negative effect for growth, but as those prices collapsed they give a positive kicker on profitability and margin of consumer goods companies,' he says. French calls this a 'goldilocks scenario' for these companies but it will have a negative impact in the oil and gas sector.
'Even if the real economy slows down, demand for these products will continue apace. The rural poor in India using Colgate toothpaste aren’t concerned about the greed of Wall Street,' he says.
Even though French feels that the theory of decoupling is occurring he doesn't invest directly into developing markets. He thinks that this makes the fund a 'safer' bet as there is no exposure to China, Russia and Latin America. 'We invest solely in countries in the West that are providing goods and services that those econmies want,' he says.
At some point in the next couple of years he feels that the big question will be when to move back into the commodities supercycle. He isn't tempted at current levels but keeping his eye on this is the number one priority.
Over the three years to the end of September, French has posted a 23.8% return with the Global Basics fund compared to a 16.3% rise in the customised benchmark he follows.