Over the last decade, the role and prominence of technology companies in emerging markets has increased markedly. Emerging markets economies have proven themselves capable of producing truly world-leading tech firms. And as smartphone penetration has surged, the positive impact of technology on daily life in emerging markets has been very significant.
At one point in the past, ‘technology’ in emerging markets meant hardware assembly in Taiwanese factories and the outsourcing of repetitive data entry to India. It was a paradigm based mostly on wage arbitrage, in which technology leadership sat firmly in developed markets.
That world has been turned on its head.
World’s largest pool of engineering and entrepreneurial talent
Now, the most advanced manufacturing companies in the world are just as likely to be located in Taiwan and Korea as they are in Germany and Japan. Semiconductors are the archetypal example: the cutting edge chips can only be made in emerging markets1. And this isn’t only a phenomenon pertaining to hardware.
The leading edge of online innovation has migrated from Silicon Valley to Chinese tech hubs like Shenzhen and Hangzhou1. Whilst in the past Chinese internet companies were berated for shamelessly copying the innovations of companies headquartered in California, today it is more often the case that America’s tech giants imitate features first developed in China.
In hindsight, perhaps this was always a likely outcome. Developing countries contain the world’s largest pools of both engineering talent and of highly motivated entrepreneurs. The combination has been a potent recipe for the creation of innovative globally competitive businesses.
Eastern Europe is a case in point: its education system has been the bedrock on which the region has produced a number of truly world-leading software companies. For instance, Prague-headquartered Avast2 is one of the world’s largest cybersecurity companies. It uses machine learning to continuously tweak its software and prevents 1.5bn attacks per month on its 435 million users around the world1.
Similarly impressive Eastern European software and internet companies have grown up in Minsk, Bucharest, Warsaw, and Moscow.
An evolving opportunity set
Very often companies from these countries choose to list in London or New York rather than their home markets – underlining the need for investors’ to place economic reality above place of listing in defining the emerging markets opportunity set1.
The emergence of these kinds of companies has fundamentally changed the Global Emerging Markets asset class. Years ago, the important companies were larger banks and resource companies, and the universe was overwhelmingly cyclical. Today, these have been replaced by advanced manufacturers and online platform businesses. Rather than commodity prices and macroeconomic fluctuations, these companies’ earnings are driven by long-term structural trends.
Reducing inequality of income and of opportunity
Many of these secular shifts are continuously improving the lives of people in emerging markets and contributing positively to sustainable development outcomes.
Argentine internet company Mercado Libre2 is a fantastic example. Its core business is an e-commerce platform on which 11.6 million entrepreneurs across Latin America are able to reach a pan-continental market1. Their slogan “democratizing commerce” captures the impact well: these small companies would otherwise be unable to reach such large audiences and scale up over time.
Mercado Libre has built a number of adjacent businesses around its marketplace, many of which are tailor-made for the challenges facing small businesses in Latin America. For instance, historically in Latin America bank fees have been very high and small businesses have been unable to access sufficient finance. So in order to support its clients, Mercado Libre launched its own payments business which is now expanding into lending to SMEs.
The alignment of all stakeholders is clear: the better that their clients are able to grow their businesses, the more throughput that occurs via Mercado Libre’s various business lines. The net effect is the creation of thousands of additional jobs at the bottom of the pyramid in a region of the world that sorely needs ways to reduce inequality of income and of opportunity.
An exciting future
The prospects for companies like Avast and Mercado Libre over the next decade give us great optimism for the future of emerging markets, their ability to produce new world-leading companies, and the delivery of tangible development benefits in poorer countries. We hope to continue to generate such exciting investment ideas in coming years.
Certain statements, estimates, and projections in this document may be forward-looking statements. These forward-looking statements are based upon Stewart Investors’ current assumptions and beliefs, in light of currently available information, but involve known and unknown risks and uncertainties. Actual actions or results may differ materially from those discussed. Readers are cautioned not to place undue reliance on these forward-looking statements. There is no certainty that current conditions will last, and Stewart Investors undertakes no obligation to correct, revise or update information herein, whether as a result of new information, future events or otherwise.
View our list of investment terms to help you understand the terminology within this document.
This document has been prepared for general information purposes only and is intended to provide a summary of the subject matter covered. It does not purport to be comprehensive or to give advice. The views expressed are the views of the writer at the time of issue and may change over time. This is not an offer document, and does not constitute an offer, invitation, investment recommendation or inducement to distribute or purchase securities, shares, units or other interests or to enter into an investment agreement. No person should rely on the content and/or act on the basis of any matter contained in this document.
This document is confidential and must not be copied, reproduced, circulated or transmitted, in whole or in part, and in any form or by any means without our prior written consent. The information contained within this document has been obtained from sources that we believe to be reliable and accurate at the time of issue but no representation or warranty, express or implied, is made as to the fairness, accuracy or completeness of the information. We do not accept any liability for any loss arising whether directly or indirectly from any use of this document.
References to “we” or “us” are references to Stewart Investors. Stewart Investors is a trading name of First Sentier Investors (UK) Funds Limited, First Sentier Investors International IM Limited and First Sentier Investors (Ireland) Limited. First Sentier Investors entities referred to in this document are part of First Sentier Investors, a member of MUFG, a global financial group. First Sentier Investors includes a number of entities in different jurisdictions. MUFG and its subsidiaries do not guarantee the performance of any investment or entity referred to in this document or the repayment of capital. Any investments referred to are not deposits or other liabilities of MUFG or its subsidiaries, and are subject to investment risk including loss of income and capital invested.
Past performance is not a reliable indicator of future results.
Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell. Reference to the names of any company is merely to explain the investment strategy and should not be construed as investment advice or a recommendation to invest in any of those companies.
Hong Kong and Singapore
In Hong Kong, this document is issued by First Sentier Investors (Hong Kong) Limited and has not been reviewed by the Securities & Futures Commission in Hong Kong. In Singapore, this document is issued by First Sentier Investors (Singapore) whose company registration number is 196900420D. This advertisement or publication has not been reviewed by the Monetary Authority of Singapore. Stewart Investors is a business name of First Sentier Investors (Hong Kong) Limited. Stewart Investors (registration number 53310114W) is a business division of First Sentier Investors (Singapore).
In Australia, this document is issued by First Sentier Investors (Australia) IM Limited AFSL 289017 ABN 89 114 194 311 (FSI AIM). Stewart Investors is a trading name of FSI AIM.
This document is not a financial promotion. In the United Kingdom, this document is issued by First Sentier Investors (UK) Funds Limited which is authorised and regulated in the UK by the Financial Conduct Authority (registration number 143359). Registered office: Finsbury Circus House, 15 Finsbury Circus, London, EC2M 7EB, number 2294743.
European Economic Area (“EEA”)
In the EEA, this document is issued by First Sentier Investors (Ireland) Limited which is authorised and regulated in Ireland by the Central Bank of Ireland (registered number C182306) in connection with the activity of receiving and transmitting orders. Registered office: 70 Sir John Rogerson’s Quay, Dublin 2, Ireland, number 629188.
In certain jurisdictions the distribution of this material may be restricted. The recipient is required to inform themselves about any such restrictions and observe them. By having requested this document and by not deleting this email and attachment, you warrant and represent that you qualify under any applicable financial promotion rules that may be applicable to you to receive and consider this document, failing which you should return and delete this e-mail and all attachments pertaining thereto.
In the Middle East, this material is communicated by First Sentier Investors (Singapore).
If in doubt, you are recommended to consult a party licensed by the Capital Markets Authority (“CMA”) pursuant to Law No. 7/2010 and the Executive Regulations to give you the appropriate advice. Neither this document nor any of the information contained herein is intended to and shall not lead to the conclusion of any contract whatsoever within Kuwait.
UAE - Dubai International Financial Centre (DIFC)
Within the DIFC this material is directed solely at Professional Clients as defined by the DFSA’s COB Rulebook.
By having requested this document and / or by not deleting this email and attachment, you warrant and represent that you qualify under the exemptions contained in Article 2 of the Emirates Securities and Commodities Authority Board Resolution No 37 of 2012, as amended by decision No 13 of 2012 (the “Mutual Fund Regulations”). By receiving this material you acknowledge and confirm that you fall within one or more of the exemptions contained in Article 2 of the Mutual Fund Regulations.
United States of America
In the United States, this document is issued by First Sentier Investors International IM Limited, as SEC registered investment adviser. Stewart Investors is the trading name of First Sentier Investors International IM Limited. This material is solely for the attention of institutional, professional, qualified or sophisticated investors and distributors who qualify as qualified purchasers under the Investment Company Act of 1940 (hereafter the “1940 Act”), as accredited investors under Rule 501 of SEC Regulation D under the US Securities Act of 1933 (“1933 Act), and as qualified eligible persons as defined under CFTC Regulation 4.7. It is not to be distributed to the general public, private customers or retail investors.
In other jurisdictions where this document may lawfully be issued, this document is issued by First Sentier Investors International IM Limited which is authorised and regulated in the UK by the Financial Conduct Authority (registration number 122512). Registered office 23 St. Andrew Square, Edinburgh, EH2 1BB number SC079063.