Casinos have trumped noodle makers in Asia’s stock markets this year as investors become more concerned about buying into the Asian consumption story.; Bargains Harder to Find Among Consumer Stocks

In Asia, Consumer Discretionary Sector Outperforms

Bargains Harder to Find Among Consumer Stocks

DANIEL INMAN and JAKE MAXWELL WATTS

Nov. 5, 2013 5:59 a.m. ET

Casinos have trumped noodle makers in Asia’s stock markets this year as investors become more concerned about buying into the Asian consumption story. Buying stocks that stand to benefit from Asia’s rising affluence has proved popular for years, especially in rapidly expanding economies like China and Southeast Asian markets such as Thailand and the Philippines. But investors are now shifting their attention away from staple goods toward consumer-discretionary companies.Firms in the consumer-discretionary sector—among them department stores, car makers and casinos—have been the best performers, gaining 13% this year through Monday, according to an MSCI index that tracks regional companies. That has beaten the 5.5% gain in companies selling everyday items like food, drinks and tobacco and compares with a 3.2% gain in the region’s benchmark, the MSCI Asia ex Japan index.

The popularity of the consumption theme has pushed up valuations on many of these stocks, especially those in the staple-goods sector. An MSCI index that tracks the sector is trading at just under 24 times forward earnings. That compares with just 12.5 times for the broader regional benchmark.

Pricier stocks include Hong Kong-listed noodle maker Tingyi (Cayman Islands) HoldingCorp. TCYMY -1.61% , which trades at 37 times forward earnings, and Thai home-improvement retailer Home Product Center Public Co. HMPRO.TH +2.70% , which is priced at about 33 times.

“Chinese consumer stocks have always been high, but they have always been delivering,” said Arthur Kwong, head of Asian-Pacific equities at BNP Paribas Investment Partners in Hong Kong. He added that consumers in Southeast Asia are following the lead of counterparts in China by demanding more high-end luxury goods and increasingly preferring foreign brands to less fashionable local alternatives.

But in staple goods, local companies are faring better than their foreign competitors because they understand their local markets more, making them better suited to expand organically as demand shifts from “mom and pop” shops to branded chain stores, said Mr. Kwong.

Still, those stocks “are not cheap at all,” said Mr. Kwong. “People realize there’s some potential [so] it’s not easy to find something very good and also very cheap.”

Hefty valuations have persuaded some investors to lighten up on their holdings in the general consumer sector. Navis Capital Partners, a Malaysia-based private and public equity firm with about $3 billion under management, started targeting consumption stocks in the mid-2000s but recently reduced its exposure to the sector from overweight to neutral.

“We have to hunt and peck and look under rocks” for fairly valued companies, said Richard Foyston, co-founder at Navis. “We have reduced our exposure to the consumer sector,” he said, “not so much because we think there are problems…it’s more just not seeing the value opportunities that we see in other areas.”

Still, many investors believe that rising incomes will keep consumption strong in coming years. There are about 100 million households in China and India with an annual income greater than $10,000, according to Citi Asia research, and this number is expected to quadruple over the next decade. The bank also forecasts that by 2020, consumer spending in Asia will surpass that in North America.

“The basic demand structure is still in place,” said Mark Mobius, executive chairman ofTempleton Emerging Markets EMF -1.08% Group, who manages more than $50 billion of emerging-market stocks at Franklin Templeton Investments.

To avoid high valuations in the consumer sector, Mr. Mobius often makes indirect plays that are cheaper than investing directly. For China, for example, he holds foreign companies that have a strong presence in the country.