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By Bridget B. Hughes, CFA | 06-13-2013 12:00 PM

Jain: Emerging-Markets Consumer a Secular Growth Story

Emerging-markets consumer stocks are one of the few areas of long-term growth as the people are buying, eating, and drinking better, says Virtus Foreign Opportunities manager Rajiv Jain.

Bridget Hughes: Hi. I’m Bridget Hughes. I’m part of the analyst group here at Morningstar. I’m here at the Morningstar Investment Conference with Rajiv Jain of Vontobel Asset Management. He just joined us for our international panel, so thank you for being here and participating in that panel.

Rajiv Jain: Thanks for having me here.

Hughes: When we look at your portfolio, which is a compact portfolio of fewer than 50 stocks in the foreign specific portfolio, there is a heavy concentration in consumer-oriented, more staples type of names. Can you maybe talk a little bit about how you think about that part of the portfolio, and given the performance of some of those companies over the past three years or so, what do you think about their valuations today?

Jain: I think if you look at our consumer staples exposure over a very long period, it's not always that it is this size. Generally, we have had a significant position, but not this high. For last four-odd years, we've had a significant position because we feel that that's where we're getting sustainable secular growth because earnings growth in general in most of the world is going to be lot more difficult to get.

European problems are going to be with us for a while. It may just get worse, if you look at what's happening in Italy and Spain; Greece was, as you know, just downgraded to emerging-markets [status] again. Japan we feel the whole massive amount of quantitative easing may not be the solution, especially because it's an extremely leveraged country. A third of their government revenue, give-and-take, already going for debt service, and interest rates are under 1%. So, if they're successfully in raising inflation, the question is what happens to interest rates and what happens with debt service? The United States, as you know, has massive amount of quantitative easing with zero interest rates, and how would the economy react once they sort of start tapering off? We have already started seeing some implications.

So, one of the few areas of secular longer-term growth we feel is coming from emerging-markets consumers, whether it's beer, whether it's toothpaste, and so on and so forth. So, that's where we found opportunities, and we feel, again, it's a very small group of companies which we feel can execute, whether it's Unilever, which is now in almost 60% emerging markets and extremely well-positioned. It has done a much better job than Procter & Gamble, for example, or better than Kraft. Or you can look at Nestle, which is a perennial in our portfolio, and names like that.

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