In this podcast:
- Economies representing 70% of the Emerging Market Index1 are easing restrictions
- Two important themes in emerging markets right now
- Stock examples – strong, sustainable companies that are benefiting from opportunities
We continue to see the easing of restrictions in several of the Asian emerging markets and economic activity is resuming... These countries represent more than 70% of the emerging markets.
What is so exciting is that many technology companies... leading the transition are based in emerging markets.
Sophie: This is Sophie Heslop from Martin Currie with the fourth in our series from our Global Emerging Markets team. Today we are joined by Divya Mathur who will discuss the emerging markets companies behind the world’s leading Investment themes. Before I hand over to Divya, a recap:
The GEMS team, one of the most experienced in the industry, works collaboratively focussing on bottom-up, fundamentally driven research to create a balanced portfolio of quality growth companies that are held for the long term. ESG is an integrated part of the team’s everyday approach to assessing the material risk and opportunities of businesses and is viewed as fundamental to any holistic assessment of long-term value creation potential.
But first, before we move onto the main topic of this podcast, perhaps you could comment on the market?
We are continuing to see the easing of restrictions in several of the Asian emerging markets and economic activity is resuming, although we are aware of the risks of secondary outbreaks. These countries represent more than 70% of the Emerging Markets index and the next important data points will be growth resuming in the Western World.
Our strategy continues to hold up as we invest in those franchises where we have confidence in the long-term sustainable growth. They also have strong balance sheets which allows them to withstand prolonged weakness. A number of our holdings are also operationally benefiting from this challenging environment, particularly those in the technology, communication services and health care sectors.
What do we think are the most important themes in emerging markets at the moment and how do you find the best opportunities?
Divya: I would like to share with you two very important and very different investment themes that we see in emerging markets:
- The first is urbanisation and this is resulting in higher incomes, rising consumption levels and higher levels of physical investment helped by trends such as the creation of mega cities. There are over 30 megacities in the emerging counties, each with a population of 10m plus and they tend to have even higher consumption patterns than other large cities in the country.
- The next theme is Technology and we are presently seeing around the world how technology is changing the way consumers behave and interact, and the opportunities and challenges it is creating for businesses. What is particularly pleasing is today the Emerging Markets countries now have leadership in technology innovation and their consumers are adopting the changes first.
We have a common approach in finding the best opportunities in each investment theme, and I mentioned this earlier, we are looking for those businesses where we have conviction in their long-term sustainable growth.
Sophie: Urbanisation and Demographics are themes that I always associate with emerging markets. Can you give an example of how the portfolio is benefiting from this?
Divya: We own a company in the portfolio today called Asian Paints, India’s largest consumer paint company with over 50% domestic market share2.
This is a classic example of a demographics beneficiary in an economy where you have a low per capita consumption of paint and a growing number of households, helped by Government policies to build more affordable housing and encourage wider home ownership. Additionally, as incomes rise, consumers up-trade to the more expensive premium paints.
I first started following Asian Paints in 1997 and today we still like the long-term opportunity for the same reasons we did over 20 years ago. The only extra consideration we need to think about today is the risk facing many consumer businesses, the threat from online competition. We believe digital disruption is not an issue to the long-term sustainability of Asian Paint’s business. Why, this is because paint in India is sold through small retailers where they mix the colours in store using tinting machines, rather than just buying the paint off the shelf. If paint was sold online, not only would it need to be ready made, it would also need to be transported which is expensive as paint is a bulky item to transport over long distances.
Asian Paints is three times larger than the number two paint company; they have superior distribution and a strong heritage that dates back from 1942. It is for all these reasons that we believe the threat from online and offline competitors is low.
The dominance by Asian Paints has resulted in the company delivering over 13% p.a. sales and profit growth over the last 20 years3. What has also been pleasing is their long-term commitment towards ESG, having polices and targets that place it well ahead of global developed peers.
The emerging markets are moving up the value chain and succeeding in competing on a global scale...
Sophie: Divya, you just mentioned Digital Disruption and earlier that emerging markets have taken the leadership in certain areas of Technology. Could you explain what is happening?
Divya: Digital disruption is happening more or less everywhere, existing businesses are being challenged by new business models that are using technology as a competitive advantage. The introduction of the smartphone , the emergence of online platforms and the arrival of online payment systems has and will continue to change our lives. This is creating opportunities for many technology companies that are helping the transition to this new digital world, including those who are providing the tools and infrastructure to disrupt.
What is so exciting is that many of these technology companies that are leading the transition are based in emerging markets. These companies have become global leaders helped by Government policies, such as:
- The considerable investment in education over the years that has resulted in a large supply of graduates, particularly in Science, Technology, Engineering and Maths, or STEM graduates. Did you know that China and India combined generate 10x mores STEM graduates than the US every year? Unfortunately, in North America and Europe you are seeing shortages of workers with STEM skills.
- Governments have also provided incentives to the higher knowledge/value industries such as technology by offering grants/tax incentives. Not all emerging market countries want to be seen as just providing low-cost manufacturing bases. This has resulted in China, Korea and the rest of the emerging economies issuing more patents than the developed economies, with many of those issued in the technology sectors.
Actually Sophie, on a broader point, emerging market economies are moving up the value chain and this has also been reflected in the changing composition of the MSCI Emerging Markets Benchmark Index, which is now dominated by sectors such as technology, internet and healthcare rather than energy, material and industrial companies which dominated the index 20 years ago.
Sophie: Which Emerging Markets companies are well placed to benefit from the Technology theme?
Divya: There are many companies in emerging markets that will benefit in the Technology sector including two companies in the semiconductor sector that should be long term winners. They are TSMC and Samsung, as they both have proven technology leadership and dominant market share positions in the areas they operate in.
Both companies will benefit from the transition to 5G, which allows higher amounts of data to be transmitted quicker and with faster response times. For consumers this means smartphones that will allow streaming videos, gaming and virtual/augmented reality. For enterprise applications the ability to connect devices (IOT), connect cars and even autonomous driving becomes possible.
We know 5G will generate vast amounts of data, and this will need to be transmitted to Data Centres where it will need to be processed. This requires leading communications technology and high-performance processing capacity.
TSMC has significant exposure to these communications and higher performance compute trends, with a near monopoly on the ability to manufacture the leading technology semiconductors. Over the last 20 years it has overtaken its US and Japanese rivals and has successfully managed to navigate the changing technology trends over that period as well. TSMC has grown sales at over 15% p.a. and profits at a similar level over the last 20 years4 and has set the standards with regards to its focus on ESG policies in the global semiconductor industry.
Sophie: Thanks Divya. To summarise, Emerging Markets is an exciting place to invest given that both urbanisation and technology are acting as some of the stronger tailwinds, enabling the team to capture the growth trajectories of these economies.
The Emerging Markets are moving up the value chain and succeeding in competing on a global scale offering exposure to companies like Samsung and TSMC with dominant market share and proven technological leadership, in contrast to Asian Paints which is a great example of a long term domestic investment theme. Emerging markets are the future of tomorrow.
1Source: MSCI EM Index
3Source: Factset, 2020
4Source: Factset, 2020
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