When stocks perform as well as EM tech (or, actually, it would be fair to say Asian tech as almost all tech companies apart from perhaps Argentina’s MercadoLibre and Russia’s Yandex are based in Asia), it’s fair that investors start asking questions about the durability of such a rally.
The benign macro conditions in 2017 (accelerating global growth, a weakening dollar, strong inflows, accommodative central bank policy and persistently low inflation) have undoubtedly helped EM equity performance.
“It’s an environment of reflation without inflation, as inflation has fallen markedly in countries like Brazil and Russia, and remains contained elsewhere. Emerging markets are also the beneficiaries of a likely peak in the multi-year US dollar bull market,” says Luke Richdale, a member of JP Morgan’s EM equity team.
“Flows have been very important. A lot of flows have also come from the Chinese mainland to companies like Tencent. I don’t think this is hot money as all these companies have beaten already very high earnings expectations. Tencent and Alibaba deserve to have performed as they have. The rally has been driven by solid fundamentals. If they keep going up at this pace that may change but we are not there yet,” adds Tubbs.
EM tech companies no longer look cheap, with the exception of Samsung perhaps, but they provide a secular opportunity too. And on many metrics they are more attractive than US tech companies which arguably have seen much larger inflows over the past few years.
“Tech is growing irrespective of global growth. Valuations of Asian tech companies are very attractive compared to the US, and growth opportunities are higher,” says Tubbs.
EM overtakes the West
Not only do many emerging markets have a lot of catching-up to do, they are also adopting tech-based solutions at a quicker pace than in Europe, especially in Asia.
“One area where emerging market consumers have leapfrogged the West is in adopting mobile payments by moving to eWallets. These are used now very broadly offline, not just for simple purchases of consumer goods.
“In China, we do have exposure to Alibaba and Tencent which have vast user bases (Alibaba 450 million users, Tencent more than 900 million active users) and big ecosystems of products and capabilities and are using big data to get a better understanding of consumers and their financial habits,” says Richdale.
