Rather than catching up, emerging markets are now taking the lead in many different areas of technology. With plenty of untapped growth left, and the highest-quality firms widening their competitive moats, this area may present some of the most attractive long-term investment opportunities.
Emerging markets are at the forefront of global technology growth. Many of its tech companies are the most innovative and fastest growing in the world – driven by young, increasingly more affluent and tech-savvy populations. As a result, the MSCI Emerging Market index now has the largest technology weighting of any global index. The share of information technology in the MSCI EM index has more than doubled since the turn of the decade from 13% at the end of 2010 to 27% by the end of August 2017.
Below is a rundown of the five key reasons why we believe EM leads the tech revolution:
1. Huge appetite for tech
The sheer size of populations in emerging markets is itself an opportunity. While internet-user growth has been blistering in many EM countries, there’s still plenty of room left for expansion. China provides a stark example. Its 731 million online population is larger than that of the European Union and US combined, but represents only half of the country.
And, importantly, a significant percentage of the ‘unconnected’ in China and other EMs like India, Brazil and Russia (see chart below) are urban dwellers, which means they can be added relatively fast and cheaply. Not to forget, the youthful demographic profiles of many EMs is a real tailwind for technology, given faster adoption and creativity that characterises younger generations.
Source: Statista, IHS Markit and Wireless Broadband Alliance.
2. Power of the mobile phone
A large proportion of the population in EM is accessing the internet principally via smartphones, and this has spurred phenomenal innovation. China’s Tencent, for example, has built a whole content-driven social-networking ecosystem through mobile internet. This includes e-finance, e-commerce, ad-platforms, online-to-offline services, travel and mobile gaming – effectively making it a Facebook, PayPal, WhatsApp, and Amazon all rolled into one. US companies may have spearheaded PC internet-services, but it’s EM tech firms which are leading the mobile internet revolution.
3. Taking the lead in FinTech
FinTech – the fusion of finance and technology – is a prime example of an area where emerging markets are outpacing their developed counterparts by some margin. This is helped in no small measure by the mobile revolution, but also broader efforts to improve financial inclusion. Whether it be money transfer & payments, savings & investments, insurance or borrowing, EM exhibits more enthusiastic use of FinTech than elsewhere.
EM financial institutions have also been quick to embrace technology, making them world leaders in the use of electronic distribution channels. Indeed, contrary to what many assume, the bank with the largest Twitter following in the world is not of developed-world provenance, but Indian – Yes Bank.
4. Governments on board
Government support is another important ingredient. EM governments have been keen to use technology to increase efficiencies and reduce cost. What’s more, demographic pressures have forced governments to focus on their young and increasingly affluent populations. This rise in income and social mobility is most starkly illustrated in Asia, where the Brookings Institute estimates that over two billion people will join the middle class by 2030 – a rise of 150%.
A focus on education and innovation has also helped some EMs steal a march on developed market competitors. Indeed, in Bloomberg’s latest index of the world’s most innovative countries, South Korea once again led the field, topping the international charts in Research &Development intensity, value-added manufacturing and patent activity, and with top-five rankings in high-tech density, higher education and researcher concentration.
Source: Bloomberg, International Labour Organization, International Monetary Fund, World Bank, Organization for Economic Co-operation and Development, World Intellectual Property Organization, United Nations Educational, Scientific, and Cultural Organization.
5. EM’s tech titans
EM today boasts world-class technology firms in both the hardware and software space. Chinese names like e-commerce giant Alibaba and Tencent have built huge footprints domestically (note that in China, US tech giants like Facebook, Amazon and Google are peripheral players in their respective areas of social media, e-commerce and search engines).
Both of these companies are now extending their coverage across Asia. Armed with Asia-centric games, social networking and e-commerce platforms, we believe they will give the hitherto dominant US names very tough competition. Meanwhile, other EM tech firms, like colossus chip-maker Taiwan Semiconductor, are central players in global supply chains – providing components for major brands like Apple.
Rather than catching up, EM are now taking the lead in a whole raft of different areas of technology. With plenty of untapped growth left, and the highest-quality firms widening their competitive moats, we believe this area presents some of the most attractive long-term investment opportunities for our clients.
So in a world of low growth expectations and corresponding low interest rates, where can US investors find the capital returns they desperately need? In this environment, we believe the best way to access equity growth is through an allocation to the emerging markets (EM) asset class. And more specifically, taking an active approach to EM investing provides the most efficient route to finding such elusive growth.