Food inflation threatens pricey consumer shares

LONDON - Emerging-market consumer companies are valued at the most expensive levels on record just as surging food and energy costs curb household spending from Sao Paulo to Shanghai.

Shares in the MSCI Emerging Markets Consumer Discretionary Index traded at a 15-year high of 2.6 times net assets last week, data compiled by Bloomberg show.

Economic growth and supply shortages sent a United Nations gauge of food prices to a record last month, cutting the buying power of 2.8 billion people in Brazil, Russia, India and China who spend 19 percent of their income on groceries, compared with 6 percent in the United States, Euromonitor International data show. Consumer shares were the second-worst performers among 10 industries in periods of rising inflation since 2001, according to Morgan Stanley.

The jump in China's inflation to the fastest pace since 2008 has prompted the central bank to raise its benchmark lending rate twice since October and lift banks' reserve requirements four times in about two months.

India's central bank Governor Duvvuri Subbarao said on Jan 17 in Mumbai that the country is facing a "surge" in inflation.

Futures traders in Brazil have boosted bets on higher interest rates after the heaviest rainfall in 44 years threatened to curb food production.

Russian consumer prices rose 8.8 percent in the 12 months to December, the most in a year, prompting Bank Rossii Chairman Sergey Ignatiev to say last month he may lift borrowing costs in the first quarter.

The US Federal Reserve Board will probably keep its benchmark lending rate at a record low, near zero through at least the fourth quarter, according to the median forecast of 77 economists compiled by Bloomberg.

Emerging markets are "where the risks lie at this point, because those economies are further along in the overheating stage, and you're starting to see tightening," said Michael Aronstein, president of Marketfield Asset Management in New York, whose Marketfield Fund beat 94 percent of peers the past year.

McDonald's Corp, the world's biggest restaurant chain, will probably raise prices this year to offset rising ingredients costs, Chief Financial Officer Peter Bensen said on a conference call with analysts. Meat prices may climb as much as 3.5 percent this year, according to the US Department of Agriculture.

Inflation in seven of the 10 biggest developing nations accelerated during the most recent month that government data were available, fueled by a rally in oil prices to above $85 a barrel.

Many professional money managers are still bullish on emerging-market consumer discretionary stocks, with a net 50 percent saying they hold more shares in the group than are represented in benchmark indices. The ratio is the biggest proportion of any industry in developing countries, the US, Japan or Europe, according to a Bank of America survey of managers with $562 billion of assets that was published on Jan 18.

Mahindra & Mahindra of Mumbai trades at a 98 percent premium to Dearborn, Michigan-based Ford Motor Co, the second-largest US carmaker, price-earnings ratios show. Hering, based in Blumenau, Brazil, is 81 percent more expensive than New York-based Phillips-Van Heusen Corp, the clothing company that owns the Calvin Klein brand.

Russia's index of producer prices rose 16.7 percent in December, almost double the rate for consumer prices, government data show.

Bloomberg News

(China Daily 01/26/2011 page16)