Emerging markets remain popular with investors looking for strong returns in a global slowdown and fund managers and investors looking to gain exposure to the technology sector are no exception.
Of the top 250 information and communication technology (ICT) companies in the world, 15 are registered in the traditional Bric economies of Brazil, Russia, India and China, while a further 18 are registered in Chinese Taipei, according to the OECD Internet Economy Outlook 2012. This means approximately 13 per cent of the total are based in emerging market economies.
Of the firms identified by the report revenues rose by more than 20 per cent a year in India, Qatar, Bermuda, Mexico, Russia, Chinese Taipei and Eqypt, reflecting a number of factors, including GDP growth and ICT market growth. In addition the report shows that regionally revenues have grown faster over the past 11 years in the Middle East, at 15 per cent a year, and Africa at 12 per cent a year.
The question for investors, is how best to gain exposure to this growth.
Mixing it up
With such a growing technology capability Walter Price, senior portfolio manager at RCM Technology Trust, says their philosophy has been to do a mix of multi-national and domestic companies.
He says: “We’ve traditionally owned some Chinese stocks in the portfolio, and probably the biggest winner over the past three years has been Baidu [Chinese internet search engine], which we no longer own, but clearly that’s been an example of where the Chinese government kind of helps the local guy gain share. They have an unfair competitive advantage; they helped Baidu gain market share and influenced Google’s decision to leave the market.”
Other domestic stocks favoured by the manager include C-Trip, the leading internet travel company, but the regional stockpicks are still mixed with international companies such as Qualcomm.
“One of the reasons we own Qualcomm is because it is selling into the white box phone business [unbranded phones] in China. If you look at where the big growth in the phone industry is right now, it is smart phones that sell for less than $100 that are manufactured in southern China and have a Qualcomm chip in them and that are able to be 3G.”
He adds: “I think with these powerful multi-national companies like Qualcomm that are able to manufacture products it is more difficult for the Chinese to compete with [and] that’s a good way to play the growth in emerging markets.
“If you have somebody that has a proprietary position who’s able to protect that position, that is really the key in these emerging markets because there’s not too many of those companies, or you can buy the local companies that are pure plays on the emerging market.”
The big multi-national plays include the obvious Apple and Samsung, with the former reporting in its fourth quarter earnings conference call that its revenue from China for the three months to September 30 was $5.7bn, while total revenues from the region for the year reached $23.8bn, accounting for 15 per cent of its revenue.
Going local
However, research from an International Data Corporation’s (IDC) report on China shows the trend of building homegrown mobile operating systems (OS) is growing in the country, reflecting the fact Chinese consumers are more used to indigenous online services produced by local firms.
Therefore IDC notes Chinese homegrown OS integrate these services as their core competitive advantage over western peers, with suggestions that localising the user environment and integrating services that Chinese consumers are accustomed to can drive more data usage, speed up the development of mobile technology, and help the Chinese mobile market catch up with the rest of the world.
Dmitry Solomakhin, portfolio manager of the Fidelity Global Technology fund, notes: “For most consumer electronics or semiconductor firms, China is likely to be one of the most, if not the most important markets today.
“However, one can also get direct exposure to specific emerging markets by investing in local companies. This is especially true in the areas of internet and social media, where consumer preferences vary significantly across regions, as well as for enterprise IT, where software and services solutions need to be adjusted to local environment.”
He notes the fund has a number of holdings that are direct plays on both China consumer internet growth as well as Chinese enterprise IT demand, such as Baidu and Asiainfo, which provides billing systems for Chinese telecommunications operators.
Gordon Happell, portfolio manager on the Henderson Global Technology fund, agrees that there are examples of attractive growth companies in emerging markets both in and outside of China.
He says: “MercadoLibre is a leading online retailer across Latin America which combines unique distribution capabilities with a payment business tailored to its local markets, MercadoPago. Tencent, China’s largest online entertainment website is another business we think is particularly well positioned to benefit from the on-going popularity of social media and gaming in China as well as rising internet penetration.
“We also invest in a number of western companies exposed to secular growth in emerging markets, the payment networks Visa and Mastercard would be two such examples.
“We think these businesses offer both attractive growth in their mature markets such as the USA where electronic payments are taking share from cash and cheques as well as more secular growth in regions like Latin America and APAC which have seen the largest growth in network spending volume over the last number of quarters for both companies.”
With the rapid development of the emerging markets technology industry, particularly in smartphones and tablet computers, the key for investors appears to be finding the right mix of multi-national and domestic companies that will benefit from the growth trends in the sector.
