While the so-called FAANG mega-cap tech stocks – Facebook, Amazon, Apple, Netflix and Google-parent Alphabet – have become well-known to investors, GAM Investments’ Tim Love believes there are five emerging market companies which could form a competing acronym.
These five fast-growing stocks have been among the main drivers of S&P 500 returns in the lead-up to and during the coronavirus crisis, accounting for more than 25 per cent of the market.
But there are alternatives to be found outside of the US for investors looking for tech names with market dominance and future growth potential, according to Love, manager of the GAM Multistock - Emerging Markets Equity fund.
Indeed, he said there are five companies in the emerging markets which could be a strong alternative to the US acronym.
“We have termed this group of strong, innovative companies ‘START’,” Love said. The acronym is made up of Samsung Electronics, Tencent Holdings, Alibaba Group, Reliance Industries and Taiwan Semiconductor.
“We believe START will become an acronym within emerging markets, just like FAANG in the US, and will adjudicate the performance of the entire asset class.”
The manager said START stocks have all “bucked”, the broader trend of emerging market equities underperforming in recent years.
Comparing the performance of MSCI Emerging Markets versus the S&P 500 the index has underperformed over the past three years.
Indices performance over 3yrs
Source: FE Analytics
But despite this long-term underperformance of emerging market equities, Love said that it would be “wrong in our view, for investors to walk away”.
He explained: “Under the vast umbrella of emerging markets, one group of stocks has firmly bucked the decline and are poised to keep climbing.
“Even the souring US-China relationship that threatens to put a dampener on some Chinese stocks has not rattled this universe.”
Below, Love breaks down each of the SMART companies and why they could “present investors with a strong growth and value proposition compared to the well-known and much-publicised US FAANG names”.
Samsung Electronics
First up is South Korean company, Samsung Electronics.
There are several trends lending themselves to the company’s long-term profitability, according to Love.
He said the firm has strong margins among memory players – a type of audio server – which will support them leading the market via technology advancements.
Also, its 5G handsets “could start to generate meaningful profit by gaining market share from Huawei,” Love said.
“Improving shareholder returns is another factor supporting our positive view,” Love added.
“The company is in a much better place than many would have expected a few months ago and has shown higher resilience/improved execution with a long-term strategy that is proving increasingly transformational to drive semiconductor growth and returns.”
According to him the company’s valuation discount compared to its peers is “unjustified, in our view”, considering the its structural growth characteristics.
Love pointed out that the company has made efforts to repair some of the damage caused by vice chairman Lee Jae-Yong's bribery charges made earlier this year, with the appointment of an independent director.
While this is a step towards improving its governance, Love said it would still be a key concern along with related party transactions with its subsidiaries.
“We look forward to higher board independence and transparency,” Love said.
Tencent Holdings
The next company is Tencent Holdings, which “dominates China’s online consumer market in terms of revenue, size and traffic volume,” according to Love.
The multinational technology conglomerate provides a variety of online services and products, giving it a “diverse revenue mix”.
According to Love, some 16 per cent of its revenue comes from online adverts, 23 per cent from social networks, 26 per cent from fintech and the final 34 per cent from online games, for which it is best known.
“Most of its services rank among the top three by user base,” Love explained.
Looking at the company’s fundamentals Love said that it is highly liquid with a solid growth outlook, which has allowed the company to increase its debt load without sacrificing balance sheet strength.
“Bloomberg consensus expects Tencent can deliver 2020 sales and pre-tax earnings growth of 28 per cent and 27 per cent, respectively,” he said.
“An expansion of Tencent’s gaming business in international markets, higher social ad monetisation, greater fintech offerings, and strategic upgrades to capitalise on consumer and industrial internet are some of the positive potential catalysts for future outperformance.”
Alibaba
Next is another Chinese firm, Alibaba, whose businesses includes e-commerce, retail, internet, and technology.
Combined with Tencent the two tech giants make up 30 per cent of the market capitalisation of the MSCI China index.
Having this variety of products, Love said that it provides a compelling value proposition for sellers who will largely have everything they need in one place.
“We believe it will continue to benefit from accelerated user and merchant adoption in online groceries, cloud services and remote working applications,” Love said.
Alibaba is currently seeking a dual-listing in Hong Kong and Shanghai following the regulation changes earlier this year. Love said the dual listing is expected to be valued at $225bn.
He said: “Its experienced leadership should continue to drive product innovation and we anticipate under-monetised assets to start contributing to revenue growth meaningfully in the coming years.
“With revenue expected to climb toward $100bn in fiscal 2021 and with free cash flow rising rapidly –cash topped $54bn at the end of June – Alibaba's balance sheet has never been stronger, in our view.
“Few tech issuers, including FAANG, maintain comparable levels of cash and short-term investments.”
Reliance Industries
Now onto the R part, Love said that family-owned firm Reliance Industries is “embarking on its journey to address the $700bn organised retail and e-commerce market in India”.
Like the other companies, Reliance is another with a variety of outlets. Operating in refining, petrochemicals, oil & gas production, organised retail, digital services and financial services.
The company has been making a transition from oil and gas production into renewable energy, Love said, following the shifting customer demand from oil to alternative fuels.
He said that this move out of “pure refining”, into sustainable energy firms, would help the company re-rate to similar levels seen in other global companies.
“The vision and gumption of the company is underappreciated, in our view, and under-priced,” he added.
Taiwan Semiconductor
The final part of the emerging markets acronym is Taiwan Semiconductor, the largest dedicated semiconductor manufacturer in the world, according to Love, with around 50 per cent of the market share.
The use of semi-conductors is increasing, the GAM manager said, with more being used more in mobiles, artificial intelligence and the ‘Internet of things’. These growing technology trends look to positively benefit the semi-conductor theme.
With the testing of new, more advanced technologies and products underway, said Love, a “widening technology gap” is emerging between Taiwan Semiconductors and its peers.
This will ensure it retains a dominant market share in leading edge foundry businesses over the next three years, said Love.
“The firm’s research & development expenses and physical assets are the highest among contract chip makers, enabling it to maintain leadership in technology, market share and profitability,” he added.