In the past, Canadian investors may have seen emerging market indices as too heavy on materials and energy companies, which are also well-represented in North American indices and would over-expose them to those sectors.
But in fact, technology and consumer themes are playing an increasing role in emerging markets, says Nicole Vettise, senior vice-president and institutional portfolio manager at Franklin Templeton’s emerging markets equity business. “The emerging markets today aren’t the same emerging markets of yesteryear.”
She points to the significant changes to the MSCI Inc.’s emerging market index since 2009, when companies in the materials sector made up a more significant part of the index. Today, information technology companies now make up 15 per cent of the index, whereas materials only make up around seven per cent and energy companies are similarly reduced.
“It’s consumer and tech that are the more dominant factors now today, those are the drivers of the story going forward rather than [if] you want to get commodity exposure, which makes it quite interesting from an investor perspective.”
The growing focus on technology companies in emerging market equities has other benefits for investors, adds Vettise, noting materials companies are much more at the whim of macroeconomic factors such as international commodity prices.
In the technology space, she says, emerging markets are leapfrogging their developed market counterparts. For example, looking at intellectual property patent applications, emerging market countries filed 1.6 million in 2017, compared to around 600,000 in the United States and less than 400,000 in Japan.
Vettise sees three technology themes taking on increasing prominence in emerging markets. The under-penetration of e-commerce serves as a “multi-market opportunity,” she says, with companies such as Alibaba Group Holding Ltd., Russia’s Yandex and B2W in Brazil taking the lead.
Disruptive technology advances, including fintech and electric vehicle companies, provide another growing opportunity, as do data companies focusing on the internet of things, 5G and memory solutions, such as the Taiwan Semiconductor Manufacturing Co., Samsung Group and Huawei Technologies Co. Ltd.
Another theme that institutional investors should pay attention to is the emerging market consumer, says Vettise. Consumers in these economies increasingly have more money to spend and haven’t gone through some of the same developments, such as getting a credit card or owning a house, as those in more developed markets. Investors can take advantage of this under-penetration through emerging market retail banks in countries like Brazil, China and India, she noted.
In addition, she highlights the increasing premiumization of emerging market consumers. “People become wealthier and they want better quality goods and services,” said Vettise, noting the luxury automotive sector is currently outperforming the automotive sector in emerging markets.