We sit in the office of the Chief Executive of one of South East Asia’s leading business families, high above the bustling streets below. The group’s sprawling interests range from property development to a leading airline. But the jewel in the crown is an emerging, pan-regional snacks (fast food) business. We are invited to try some samples and we spend the next five minutes examining the various cake bars, potato chips and cookies on offer. None look especially appetising or close to healthy. As we turn over the packets in our hands, doing our best to discern ingredients, we recognise and find some nutritional information. Several ‘chocolate’ products do not appear to contain any cocoa. Slightly bemused, we raise this point with our host. He explains that the company finds it cheaper and easier to simply use vegetable fats as a substitute, and add more sugar to preserve a taste of sweetness.
Consequences of Asian incomes rising
As the disposable incomes of tens of millions of Asians rises, so does the demand for more variety and convenience in food. The sales by domestic companies serving local tastes as well as those of multinationals producing western fares have grown very quickly over the last 20 years. One consequence has been an increasingly rich universe of consumer staples companies available to investors in Asia.
However, it is clear that rising per capita income does not necessarily imply better nutrition. Much of Asia seems mid-way through a period of rapid growth in consumption of highly processed ingredients with high levels of salt, sugar and fat. Globalisation has ensured that the speed with which nutritionally poor quality food has become both available and affordable to large swathes of the urban population in emerging Asia has completely outstripped any education around sensible consumption.
The result is that large portions of the population in Asia are beginning to experience the types of non-communicable lifestyle diseases that are more often associated with older, richer and more developed western societies.
The prevalence of diabetes is now higher in Vietnam than in Japan and higher in Indonesia than Italy. Malaysia’s incidence of the disease ranks amongst the highest globally. Startlingly, rates in China and India are twice as high as in Australia, the UK or France. In countries with such large, in some cases ageing, populations and inadequate public health systems, it is no exaggeration to say that poor nutrition and the associated illnesses represents a potential health time bomb for the continent in the 21st century.
It is a tragic dichotomy that in the same Asia-Pacific region, far away from the bright lights of Hong Kong and Mumbai, live two-thirds of the world’s population of 800 million people who do not have enough food to simply live healthily. Malnutrition and stunting remains, despite the rapid economic progress of Asia over the last two decades, the norm for hundreds of millions of people in the region, primarily in rural areas in northern India, southwest China and the more remote parts of the Indonesian archipelago.
How sustainable is this?
It is within this extremely challenging and bewildering context that the team attempts to identify potential investee companies. As we meet companies around the region, we are constantly asking ourselves to consider the sustainability positioning of the businesses we meet. We set out to find those which are best positioned to contribute to and benefit from sustainable human development in the region over the next ten years.
In the area of food and beverages, that means trying to find companies that we think can continue to increase sales in a profitable way over the next ten years, governed by sensible management teams who will deliver reliable and steadily growing cash flows to shareholders. Often, this means seeking out those companies focused on increasing rural, bottom of the pyramid consumption and those products which are truly needed by the end-user.
We are trying to find companies whose products, by their nature, are well-positioned for future health and wellness trends. In countries around the world, the manufacturers of excessively unhealthy products are facing headwinds to earnings growth. This is coming on one hand from changing consumer preferences, reflecting a growing underlying awareness of health issues around sugar and salt consumption. At the same time, governments are throwing up barriers in the form of heavier regulation and special taxes in the knowledge that such products can create significant costs for society which will be borne through the public purse via future health spending.
These headwinds are relevant long-term investment points in Asia not 20 or 30 years from now, but today. Just as Asia has experienced an increase in these problems earlier and faster than the west did, the region may begin to address them at a pace that few currently expect. Consequently, we consider a rupee or baht of earnings from selling milk or oatmeal to be far lower risk than earnings from selling snacks made from vegetable fats and sugar. Investing in the former seems a far more sober and responsible way of preserving and growing clients’ capital over time in a low-risk manner.
Jack Nelson is an Investment Analyst at First State Stewart (part of Colonial First State Global Asset Management).