Techie Tiger, Digital Dragon
Technology has evolved beyond all recognition in Emerging Markets. Is investment in this burgeoning sphere access to a new world that is not bound by the economic traditions of western countries?
Article by Michel Perera, Chief Investment Officer at Canaccord Genuity Wealth Management
Some might think ‘emerging market technology’ is an oxymoron, but investors should be wary of jumping to such facile conclusions. Today, the picture of emerging markets (EM) as commodity exporters and cheap factories is fast becoming outdated. This article reveals how EM have developed technologically beyond recognition, and explains why this should be reflected in investment portfolios.
To be fair, there are still some EM that fit the above stereotype, but they are fewer than before. There are also enough large EM countries with a technological footprint to make a difference in our daily developed market lives.
The obvious examples are South Korea and Taiwan, exporters of electronic components for decades. Today, companies like Samsung Electronics and Taiwan Semiconductor, which compete with the likes of Intel, are at the forefront of DRAM and NAND semiconductor technology, a US$400-billion industry.
This is not news for industry followers – but what may be news is the way countries like China and India have developed to challenge major US technology firms and change people’s way of life beyond recognition.
Today, China has the highest rate of internet sales in the world (at 20 per cent, ahead of the US and the UK). Its internet banking payment systems, Alipay and Tenpay, are used by 520 million and 360 million people respectively. Many Chinese today do not use cash or credit cards and pay exclusively through these platforms.
The social media mobile app WeChat has close to one billion subscribers. It is known in Asia as the ‘App for Everything’ and boasts an augmented reality platform and 3D appearance. China also has three times as many smartphone users as North America. Alibaba’s Singles’ Day in China dwarfs Black Friday in the US and is a digital shopping affair. Next year, China is slated to overtake the US in research and development spending.
China’s technology drive started as a protectionist move to stop US firms moving into the country, but since then these businesses have expanded outside China, giving US internet giants a run for their money. Their growth and stock market performance have been every bit as stellar as those of the large US firms.
Today, some Chinese tech companies are the equivalent of their US counterparts in most sub sectors of the technology world: Alibaba and JD.com are like Amazon, Baidu like Google, Sina Corp like Twitter, Ctrip like Expedia, Vipshop like Groupon and Tencent like Facebook. Indeed, the three large internet companies, Alibaba, Baidu and Tencent, are among the top 10 in the world.
In the recent Communist Party Congress, China set itself an ambitious plan to develop sectors like robotics, semiconductors, artificial intelligence, big data, electric vehicles and alternative power, as well as biotech, where it already has a large footprint. Whether they succeed or not is anybody’s guess but the resolve, funding and government backing should not be underestimated.
Advances in India
India is also ahead of the developed world in various areas. The Indian software engineer may be a folk figure in most western countries, but the reality is that a country sorely lacking in basic infrastructure has leapfrogged western technology. Following the demonetisation reform last year, where 85 per cent of the currency was removed without warning, India’s merchants have been racing towards digital payment systems like Paytm. Crucially, the groundwork for the next step in payments has been laid.
The Aadhaar system is a 12-digit unique-identity number issued to all Indian residents, based on their biometric and demographic data. Over 1.171 billion people have had their fingerprint and iris scan registered, creating the largest digitalised database in the world and turning India into a digital economy, with the ability to bypass credit and debit cards altogether. This enables people to open a bank account in 10 minutes with a mobile phone and fingerprint reader. Soon this will lead to purchases without any credit card or phone. Over 99 per cent of Indians aged 18 or over have been enrolled in Aadhaar.
In addition, India now has the world’s largest dedicated 4G LTE network. Its data usage has already surpassed China and the US.
Most investors still believe that EM equities are driven by commodity prices and cheap labour in basic manufacturing. In fact, close to 30 per cent of EM equity indices are technology. We think it won’t take long before EM investment is finally seen for what it really is: the access to a new world that is not bound by the economic traditions of western countries.