Emerging market growth without the regulatory headache

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Livewire Markets

In a world of stagnant developed economies emerging markets remain one of the true sources of growth. But as 2021 has highlighted, accessing that growth is not so straightforward. Emerging markets come with layers of complexity around governance and regulation.

The growth opportunity is not lost on Shannon McConaghy and his colleagues at VGI Partners. Rising levels of education, entrepreneurship and wealth in Asia’s female population is fueling demand for luxury goods such as watches and jewellery.

A recent Morgan Stanley study points to the fact that in 2014, 52% of jewellery shoppers in their study were female. Now, it's over 80%.

In this short video, McConaghy discusses this trend in more detail and shares a company listed in Switzerland that is riding this tailwind.

Edited transcript

Where are you finding the majority of your investment ideas?

At VGI Partners, the majority of our investments are in securities listed in developed markets with robust regulatory and legal frameworks. We find great opportunities in these investments to capture growth in Asia and other developing markets. An example of this is Richemont, which is not even listed in Asia - it's listed in Switzerland.

We are actually seeing real, tangible evidence of female empowerment driving jewellery consumption in China.

Richemont is a brand synonymous with quality via its Cartier and Van Cleef & Arpels jewellery brands. Richemont is very, very well exposed to some rising trends in Asia, which include female empowerment. 45% of Richemont sales are currently Asia Pacific. 

That's around double the sales that they receive in their home market in Europe. And what we're seeing in Asia from a structural growth perspective is very, very powerful.

In Asia we've seen a dramatic rise in female tertiary education rates, well above men, particularly in China. This is leading to higher levels of female income as they receive higher end roles. But also, we're seeing a really strong trend of female entrepreneurship where we're seeing very successful growth in the number of high-profile female business leaders, which is attracting more female entrepreneurs into other business start-ups. We are actually seeing real, tangible evidence of female empowerment driving jewellery consumption in China.

A recent Morgan Stanley study points to the fact that in 2014, 52% of jewellery shoppers in their study were female. Now, it's over 80%. 

And so we've seen a real transition that is occurring and will continue to structurally play out in our opinion, not just in China, but in other Asian markets where we have a strong trend towards female empowerment.

Other aspects that are interesting about Richemont to us, are its e-commerce platform Yoox Net-A-Porter. This is a preeminent e-commerce platform for luxury items globally. In fact, it's so sought after that Alibaba has established a joint venture with Yoox Net-A-Porter, which we think provides really appealing access to that growth in Asian female empowerment.

At the moment, however, we think the market is actually penalising Richemont for its holding in Yoox Net-A-Porter, which is an early-stage investment business in generating losses and reducing its current earnings. 

Now, we are long term investors and we look at the future path of earnings and the structural trends. We feel this is actually something that adds appealing upside optionality to the Richemont share price. 

We also feel that the market is undervaluing Richemont's core business, and that structural trend occurring in Asia.

A lot of consumption of these luxury items is not via the billionaires. It's via people who have become upper-middle class. And we are seeing a dramatic rise in the cohort of upper middle class throughout Asia. 


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