Some investors are unaware that technology is now the largest sector in the MSCI Emerging Market index, making up nearly a quarter of the index by market capitalisation.
Global leaders such as Samsung (smartphones, semiconductors, displays), TSMC (semiconductor foundry) and Hon Hai (outsourced assembly for Apple) compete and win in some of the most technologically-demanding and capital-intensive sectors in the world.
There is also a relatively long tail of smaller suppliers to these and other large companies (including well-known developed market technology companies like Apple and Cisco), although many of these companies may fall below UK investors’ liquidity constraints.
The other major group of emerging market companies in terms of size are the internet players. The MSCI EM Technology index has been a rare bright spot in emerging market investing over the past seven years, as billions of people have come online and started to use the mobile internet in their daily lives.
It returned nearly 60 per cent from the start of 2011 until March 2017, whereas the returns for the financials and industrials indices were negative over this period.
Furthermore, many of these companies have generated large profits – not always the case in fast-growing technological or emerging markets. Recent research from Credit Suisse suggests that the economic profits generated by Asian online companies reached $15bn in 2016, up from only $2bn in 2010. These companies have also been more profitable than their US peers when measured as economic profit as a share of gross investment.
Source: Neptune
Further to go?
We find that the mistake some investors make when thinking about emerging market internet companies is that they overstate parallels with the development of developed market internet companies.
Alibaba is not ‘the Amazon of China’ (their model is more like Google if anything), and the economic environment in which emerging markets companies compete is very different.
Offline retail infrastructure is often far less developed in Emerging Markets: India has 5 metres squared of retail space per 1,000 people, China 39 and Brazil 63; Spain has 245 metres squared and the US has an enormous 2,000 metres squared for every 1000 people.
E-commerce penetration rates are unsurprisingly higher in China than in the US given this context – online shopping allows Chinese consumers access to goods and services they would otherwise struggle to find. This suggests that the ecommerce market may not evolve in exactly the same way in emerging markets, and is better thought of in terms of a parallel evolution.
The mobile internet also plays a slightly different role in everyday life in many emerging markets. Chinese consumers spend about as long consuming mobile media as their US counterparts (~170 minutes per day), but far less watching TV, listening to radio or reading printed materials (source: Bernstein).
Smartphones represent a greater portion of media consumption, and so it is no surprise we see the large internet companies investing aggressively in their own online media, sports, news and gaming content.
Tencent’s WeChat is actually a much richer equivalent to Facebook’s WhatsApp: users can pay bills, order cabs, buy goods, pay taxes and play games without leaving the chat app. We were surprised to find on our last visit to China that younger tech management teams have dispensed with physical business cards altogether and just present their WeChat QR code for scanning.
Emerging market tech brings risks around governance and intense competition, but it also provides glimpses of the future that could outshine developed markets.
Ali Unwin is manager of the Neptune Global Technology Fund. All views are his own and should not be taken as investment advice.