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 material is for general information purposes only. It does not constitute investment or financial advice and does not take into account any specific investment objectives, financial situation or needs. This is not an offer to provide asset management services, is not a recommendation or an offer or solicitation to buy, hold or sell any security or to execute any agreement for portfolio management or investment advisory services and this material has not been prepared in connection with any such offer. Before making any investment decision you should conduct your own due diligence and consider your individual investment needs, objectives and financial situation and read the relevant offering documents for details including the risk factors disclosure. Any person who acts upon, or changes their investment position in reliance on, the information contained in these materials does so entirely at their own risk.
We have taken reasonable care to ensure that this material is accurate, current, and complete and fit for its intended purpose and audience as at the date of publication but the information contained in the material may be subject to change thereafter without notice. No assurance is given or liability accepted regarding the accuracy, validity or completeness of this material.
To the extent this material contains any expression of opinion or forward-looking statements, such opinions and statements are based on assumptions, matters and sources believed to be true and reliable at the time of publication only. This material reflects the views of the individual writers only. Those views may change, may not prove to be valid and may not reflect the views of everyone at First Sentier Investors.
Past performance is not indicative of future performance. All investment involves risks and the value of investments and the income from them may go down as well as up and you may not get back your original investment. Actual outcomes or results may differ materially from those discussed. Readers must not place undue reliance on forward-looking statements as there is no certainty that conditions current at the time of publication will continue.
References to specific securities (if any) are included for the purpose of illustration only and should not be construed as a recommendation to buy or sell the same. Any securities referenced may or may not form part of the holdings of First Sentier Investors' portfolios at a certain point in time, and the holdings may change over time.
References to comparative benchmarks or indices (if any) are for illustrative and comparison purposes only, may not be available for direct investment, are unmanaged, assume reinvestment of income, and have limitations when used for comparison or other purposes because they may have volatility, credit, or other material characteristics (such as number and types of securities) that are different from the funds managed by First Sentier Investors.
Not all products are available in all jurisdictions.
This material is neither directed at nor intended to be accessed by persons resident in, or citizens of any country, or types or categories of individual where to allow such access would be unlawful or where it would require any registration, filing, application for any licence or approval or other steps to be taken by First Sentier Investors in order to comply with local laws or regulatory requirements in such country.
This material is intended for ‘professional clients’ (as defined by the UK Financial Conduct Authority, or under MiFID II), ‘wholesale clients’ (as defined under the Corporations Act 2001 (Cth) or Financial Markets Conduct Act 2013 (New Zealand) and ‘professional’ and ‘institutional’ investors as may be defined in the jurisdiction in which the material is received, including Hong Kong, Singapore and the United States, and should not be relied upon by or be passed to other persons.
The First Sentier Investors funds referenced in these materials are not registered for sale in the United States and this document is not an offer for sale of funds to US persons (as such term is used in Regulation S promulgated under the 1933 Act). Fund-specific information has been provided to illustrate First Sentier Investors’ expertise in the strategy. Differences between fund-specific constraints or fees and those of a similarly managed mandate would affect performance results.
About First Sentier Investors
References to ‘we’, ‘us’ or ‘our’ are references to First Sentier Investors, a global asset management business which is ultimately owned by Mitsubishi UFJ Financial Group, Inc (MUFG). Our investment team operates under the trading name of Stewart Investors which is part of the First Sentier Investors Group.
This material may not be copied or reproduced in whole or in part, and in any form or by any means circulated without the prior written consent of First Sentier Investors.
We communicate and conduct business through different legal entities in different locations. This material is communicated in:
- Australia and New Zealand by First Sentier Investors (Australia) IM Ltd, authorised and regulated in Australia by the Australian Securities and Investments Commission (AFSL 289017; ABN 89 114 194311)
- the European Economic Area by First Sentier Investors (Ireland) Limited, authorised and regulated in Ireland by the Central Bank of Ireland (CBI ref no. C182306; Registered office: 70 Sir John Rogerson’s Quay, Dublin 2, Ireland; Company no. 629188).
- Hong Kong by First Sentier Investors (Hong Kong) Limited and has not been reviewed by the Securities & Futures Commission in Hong Kong. First Sentier Investors and Stewart Investors are business names of First Sentier Investors (Hong Kong) Limited.
- Singapore by First Sentier Investors (Singapore) (Company no. 196900420D) and this advertisement or material has not been reviewed by the Monetary Authority of Singapore. First Sentier Investors (registration number 53236800B) and Stewart Investors (registration number 53310114W) are business divisions of First Sentier Investors (Singapore).
- Japan by First Sentier Investors (Japan) Limited, authorised and regulated by the Financial Service Agency (Director of Kanto Local Finance Bureau (Registered Financial Institutions) No.2611).
- the United Kingdom by First Sentier Investors (UK) Funds Limited, authorised and regulated by the Financial Conduct Authority (FCA ref no. 143359; Registered office: Finsbury Circus House, 15 Finsbury Circus, London EC2M 7EB; Company no. 2294743).
- the United States by First Sentier Investors (US) LLC, authorised and regulated by the Securities Exchange Commission (RIA 801-93167).
- other jurisdictions, where this document may lawfully be issued, by First Sentier Investors International IM Limited, authorised and regulated in the UK by the Financial Conduct Authority (FCA ref no. 122512; Registered office: 23 St. Andrew Square, Edinburgh, EH2 1BB; Company no. SC079063).
To the extent permitted by law, MUFG and its subsidiaries are not liable for any loss or damage as a result of reliance on any statement or information contained in this document. Neither MUFG nor any of its subsidiaries guarantee the performance of any investment products 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.
© First Sentier Investors Group