Tech investors in EMs please note

While money managers believe that emerging market tech firms should outperform the likes of Amazon and Google, here are some interesting facts to note.
By Morningstar |  24-05-18 | 
 

According to an article that appeared in Morningstar UK which quotes various money managers, the rise in technology stocks will be led, not by the so-called FAANG, but by new names in emerging markets. Emerging market tech firms should outperform the likes of Amazon and Google.

(FAANG - Facebook, Apple, Amazon, Netflix, Google)

Here are some key observations from that post.

# Blockchain technology is an area of growing interest – Venezuela is the first nation to have launched a virtual currency.

# The MSCI Emerging Markets Information Technology index has returned 94% in U.S. dollar terms over the past 5 years, compared with 135% from the Dow Jones Technology index. Emerging market tech returns are expected to be double what we get from developed markets in the next 5 years. By that estimate, emerging market tech is trading on a 25% discount to its developed market counterpart.

#  Chinese ecommerce names dominate the index – the likes of Alibaba and Tencent – but the fastest growing ecommerce region behind Asia is Latin America, where stocks include Argentina’s MercadoLibre.

# There’s been a major shift in the make-up of the MSCI Emerging Markets index: the information technology sector accounts for 27.8% of the index, compared with just 12.9% in 2010. Back then, energy stocks took up 14.3% of the index – a number which has since halved. This means technology is now a bigger influence on emerging markets equity returns than even during the dot-com era.

The below graph has been taken from Bloomberg which employed year-end data, except for 2018 where first-quarter figure is given.

EM

According to this report by SEI:

Over the past 20 years, technology companies went from comprising just 1.5% of the MSCI Emerging Markets Index market capitalization in 1997 to nearly 27% as of 30 June 30, 2017.

The top-5 market-capitalization weighted stocks in the index are technology companies Samsung, Alibaba, Naspers, Tencent and Taiwan Semiconductor. Collectively, they make up nearly 18% of the Index. By comparison, in 1997, the top-five stocks by market capitalization were a mix of telecommunications and utilities companies that occupied just 10.5% of the Index.

The MSCI Emerging Markets Index has also undergone a big transformation in geographical terms. Driven by the growing importance of China in the index, it is now dominated by Asian countries. China’s weight in the index is expected to continue to grow along with the gradual increase of the country’s renminbi-denominated A share stocks.

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