Alex Brummer

INVESTMENT SPECIAL: Passports to China

FTSE blue-chips offer safer access to emerging markets

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One of the remarkable statistics to emerge from the euroland crisis is the scale of UK trade with the Irish Republic. Export traffic across the Irish Sea amounts to 7 per cent of the total: more than all our trade with the fast growing ‘BRIC’ economies — Brazil, Russia, India and China. The consequence is that UK plc looks to be missing out on the high-growth emerging markets which are forecast to power a 4.5 per cent expansion of the global economy in 2011.

The coalition has sought to plug this gap with high-profile trade missions such as last year’s excursion to China led by David Cameron. The reality is, however, that all the missions seem to have achieved so far is $2 billion of orders for Rolls-Royce engines to power the A380 Airbus. This may be satisfying in the light of Rolls’s recent mishap with a Trent engine in a Qantas plane over Singapore, but one suspects the orders would have come irrespective of ministerial efforts. Access to Asian markets for the world’s top aero-engine maker is a given.

All of this creates a problem for UK investors wanting to share in BRIC growth prospects. There’s no shortage of direct routes, such as Fidelity guru Anthony Bolton’s China Special Situations investment trust. Another respected manager, Neptune, offers access via its China Fund. But these funds invest directly in Chinese enterprises, with all the risks of boom-bust speculation and uncertain accounting. How much better it would be to enjoy the emerging-market story by investing in FTSE100 stocks. One route is via specialist funds such as M&G Global Basics, managed by Graham French. But it is also possible to take the direct route by buying individual companies. This might not be as difficult as it seems.

There are several FTSE players with outsize Asian ambitions. Top of my list are two very different retailers, Tesco and Burberry. In the UK grocery market, Tesco is close to saturation, and departing boss Sir Terry Leahy set a goal of balancing UK revenues with those overseas. It can be no coincidence that his successor, Phil Clarke, has spent the last few years building Tesco’s Asian businesses. In Thailand it is already a leader. In China, it is experimenting with Tesco ‘cities’ — using its property skills to make itself the anchor tenant, developer and manager of malls across the country. Indeed, Tesco’s Asian malls could be a good destination for other UK retailers. Burberry — having shaken off the ‘chav’ image it picked up in the 1990s — has re-established itself as a genuine luxury brand. Most of its designers are products of British art schools and most of its goods, including its emblematic raincoats, come from UK factories — long after mass-market retailers like Marks & Spencer gave up the ‘Made in Britain’ label. Burberry’s flair under the stewardship of Angela Ahrendts has made it a powerhouse across Asia, where the desire for designer labels among the new rich is insatiable. As the Chinese move up the income scale, so should Burberry sales. And that should make the share price flourish.

The Asian love of brands is also likely to make Diageo, the world’s largest spirits maker, an emerging-market winner. Its shares have been depressed by exposure to the struggling US economy, but it is making strong progress in China and India where Johnnie Walker, single malts and Smirnoff vodka are flourishing. It has also invested in a Chinese liquor brand, Shui Jing Fang.

In Latin America, an intensive marketing effort built around grand prix motor-racing is making Diageo a strong competitor — while the UK-based tobacco giant BAT offers an excellent way (for the less ethically fussy investor) to benefit from unreformed Brazilian smoking habits.

If all this sounds a bit traditional, then the best way to enjoy the ‘tech’ revolution in emerging markets may well be through Vodafone (which I hold). In recent years the group has been targeting emerging markets and removing itself from other places where growth is less strong. India is a big plus, as Vodafone is vying to dominate the fast expanding middle-class mobile phone market there. The group also has made a strong impact in Turkey. And a bonus in Vodafone is exposure to the success of its minority interest in Verizon Wireless in the US.

Britain may be struggling to export to emerging markets. But we have some genuine global players which are reaping the rewards of foresight and history. So there is still reason to be optimistic about the ability of investors to benefit from Asian and Latin American success.

Alex Brummer is City Editor of the Daily Mail.