Enabling the connected world

3 October 2018

Enabling the connected world

By 2025 it is expected that there will be over 75 billion connected devices worldwide.

Smart technologies are connecting and transforming the world at a truly exponential pace.

Emerging markets have been at the centre of this digital revolution and will continue to enable this transformational change long into the future, creating compelling opportunities for investors.

The data explosion

The world is becoming increasingly more connected. Mobile technologies, industrial automation, smart homes, wearable devices, autonomous vehicles and the use of artificial intelligence are merging physical and virtual environments in almost every aspect of our daily lives.

By 2020, the number of smartphone users worldwide is projected to reach almost three billion – over a third of the global population, and by 2025 it is expected that there will be over 75 billion connected devices worldwide.

The incredible expansion of the digital environment, dubbed by many as the ‘Fourth Industrial Revolution’ is creating an unprecedented explosion in data. To meet the demands of massively greater datafication, a rapid growth in hardware devices that process, store, and transmit information will be required. Hyper-scale data centres will lead the rising demand for key components, such as servers, switches and storage devices.

Many emerging market companies which have already been key protagonists in enabling the digital revolution are therefore set to play an ever-greater role in its future.

High-quality companies with large competitive moats and proven track records of innovation such as Samsung Electronics, TSMC, and SK Hynix are incredibly well placed to take advantage of a whole raft of disruption themes – cloud computing, artificial intelligence (AI), deep learning, datacentre infrastructure spending, virtual reality/augmented reality (VR/AR), autonomous vehicles, 5G and the Internet of Things (IoT) to name but a few.

Multi-sector impact

But it’s not only the hardware providers that are exposed to these structural growth factors. Digital and disruptive technologies are having a multidimensional impact across a range of sectors in emerging markets.

For instance, increasing demand in Advanced Driver Assistance Systems (ADAS) and autonomous driving are creating multiple opportunities for the companies that create and leverage this new technology. Hong Kong-listed Sunny Optical is a case in point. In addition to producing lenses for the hugely expanded smartphone market, the company is now experiencing meaningful earnings contributions from many of the camera components required to enable vehicular AI.

But this is just the tip of the iceberg. As the chart above illustrates, the vastly increased demand for new components is likely to benefit a whole range of emerging market companies.

And with the increasing computational load required for more connected products – from cars to household appliances – driving greater power consumption, the need for smart energy solutions will also provide other areas of growth, including low-power semiconductor content and enhanced battery technology.

For the latter, we have already witnessed firms such as LG Chem experiencing a very strong growth outlook through its battery business. A theme we expect to continue in the years to come.

Software

Backed by young, tech-savvy and well-educated populations, emerging market companies are also taking a lead in the software that enables the connected world.

We see huge potential for companies like software service provider and IT consultancy EPAM which are able to leverage expert knowledge in e-commerce, mobile, cloud, and other emerging technologies to meet the ever-increasing demands from further rapid, commercial digitalisation.

Smart exposure

We believe emerging market companies are taking centre stage in enabling the connected world, creating compelling opportunities for investors. Martin Currie’s Emerging Markets team has understood for some time the growth opportunities that this presents and has a strong track record of picking the winners in this environment.

Our robust, differentiated and highly-successful approach to Emerging Markets investing, based on the collaborative focus of a highly experienced team enables us to build concentrated portfolios of our strongest investment insights. Together, these capabilities form a powerful investment approach for our clients, one which we believe they can be confident will deliver exceptional long-term returns.

Past performance is not a guide to future returns. Please be aware that the information provided should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the securities discussed here were, or will prove to be, profitable.