Emerging markets fund bets on mature market habits

Frontier markets like Bangladesh, Sri Lanka attractive

ZURICH (Reuters) - Brewers, tobacco producers and casino operators could offer the best exposure to emerging markets growth as local consumers begin to mimic counterparts in developed markets, fund manager Rajiv Jain said.

Indian and Brazilian stocks make up half Jain's portfolio, but he also likes less fashionable markets such as Indonesia. He is underweight Chinese stocks, which he said are richly valued.

"We're looking for long and sustainable trends. We want high quality growth, and like quality multinationals with emerging markets exposure which tend to pay high dividends," said Jain, who runs an emerging markets fund for Swiss bank Vontobel.

The tobacco industry, typically seen as defensive, offers two of his top growth picks.

"Souza Cruz is Brazil's largest tobacco company with a 70 percent market share," Jain told Reuters.

"In the last 20 years, earnings rose when inflation was higher, showing they have pricing power. They are not only a defensive, they are growing," said Jain, who manages $11.2 billion in equities funds.

"And Indian tobacco company ITC has grown at an 18-20 percent clip and outgrown average Indian corporate earnings over the last decade."

But investors betting commodities and energy stocks will benefit most from productivity and prosperity growth in China and India risk heavy losses if inflation kicks in, Jain said.

"China is the world's biggest commodities consumer. If they tighten interest rates aggressively to check inflation, we could see a strong dip in commodities prices," said Jain.

The euro zone debt crisis and the weak dollar and euro are also putting a brake on emerging markets exports to the West, making long-term performers harder to find, said Jain.

He said his fund underweights energy and basic materials, since the United States, Japan and Europe remain the main consumers, despite the rise of emerging markets demand. Although raw materials continue to climb, an economic slowdown in China could dent prices significantly, he said. Food companies like Nestle India and Chinese brewer Tsingtao meanwhile were set to benefit from rising consumer wealth and changing habits in emerging markets.

"As income rises, consumption patterns have changed. More couples both go out to work, so they buy more packaged foods, and beer consumption is growing fast in emerging markets, while it has flattened in markets like the U.S.," he said.

"We are significantly overweight consumer staples."

He said the fund is avoiding real-estate exposure, but does invest in casino operators in Macau and Malaysia, holding shares in Genting and Wynn Macau.

Jain is also bullish on some frontier markets, and is looking to raise exposure to Bangladesh, Sri Lanka and Pakistan, while he is avoiding some more developed markets.

"Taiwan, for example, is a call on U.S. and European demand. And Samsung's profit is 80 percent derived from the U.S. and Europe so you're not really buying emerging markets."