Multi-assetOct 3 2013

Innovation remains the key to China’s economic success

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In more recent years however, businesses in the region have recognised they cannot rely on low wages, cheap currencies or protectionist measures forever. Many firms have realised that they need to offer more sophisticated, innovative products.

By competing on the basis of quality rather than price, companies should be able to expand, or protect, their margins and profitability, as well as develop more sustainable business models.

In the past few years, research & development (R&D) investment in emerging markets has risen dramatically.

For instance, between 2007 and 2012, China and India doubled their total spending.

R&D spending in emerging markets is currently increasing at a faster rate than in developed nations, albeit they are starting from a lower base. This investment is delivering tangible results.

The number of patent applications in China has soared in recent years and China has now overtaken the US.

This trend of increased R&D spending is encouraging as it indicates a commitment to innovation and the development of advanced technological products within emerging markets.

A commitment to R&D and brandbuilding should enable companies to maintain their competitive advantages and sustain their returns over time.

The recent success of Samsung’s smartphones shows how potent the combination of exciting products and a desirable brand can be.

One innovative Chinese firm that is taking on the leading global players is Hollysys Automation Technologies.

Hollysys provides sophisticated control devices and signalling systems for industrial, railway and nuclear projects.

These control technologies and applications are used to improve the safety, reliability and efficiency of systems. R&D is central to the company’s culture and has enabled Hollysys to develop industry-leading technology. Hollysys has been successful in winning contracts on China’s high-speed rail network and for nuclear power plants.

The company’s equipment is also gaining recognition overseas and it has exciting long-term prospects as it continues to develop innovative cutting-edge technologies and finds new markets for its products

There are still too many companies in emerging markets that are focused on competing on cost rather than quality.

In the longer term, however, there should be increasing numbers of emerging market companies to follow the example of firms and place the emphasis on innovation in order to drive profitability and become globally competitive.

Jenny Lowe is features editor at Investment Adviser

EMERGING MARKETS

Have investors called time on emerging markets?

Equity sell-off offers long-term opportunities

Erdinç Benli, head of emerging market equities and Manager of the JB Global Emerging Markets Stock fund claims equities and currencies in emerging markets have been suffering from investors’ sell-off mode for months.

He adds: “But investors’ indiscriminate selling provides good entry opportunities for investors with a longer-term perspective.”

EM debt suffers from murky US rate outlook

Emerging market debt has been the clear victim of changing US rate expectations, claims Chris Iggo, chief investment officer of fixed income at Axa Investment Management. He says: “The worst hit markets have been the ones most dependent on foreign capital. Actually, it has been the ones that have benefitted from capital inflows even if they needed it or not. From a fixed income investors perspective, the decision to invest in the EMD asset class – when there are myriad policy, growth, inflation, political and currency issues to contemplate – looks less rewarding on a risk-adjusted basis than investing in higher-yielding companies in the developed markets.”

Stagflation could hit Brics

Keith Wade, Schroder’s chief economist, warns that second-quarter data for Brazil, Russia and India points to a “dangerous stagflationary environment”, while China continues on its slowdown. He says: “India posted particularly weak activity data and is now focusing on currency stabilisation as the rupee plummets.”

TOP TIP: THE EM FUNDS WORTHY OF CLIENT CAPITAL

Andrew Johnston, fund analyst, Brewin Dolphin:

“The looming threat of a withdrawal of US monetary stimulus is compounding emerging market woe. As borrowing costs rise, so capital flows have started to reverse from east to west. This has left many emerging markets struggling to balance budgets and placed growth under even more pressure.

“In this instance we would agree with the investment community at large, and remain cautious on both emerging market equities and bonds.

“For those who remain committed long-term emerging market investors and who are keen to access the growing domestic consumption story, we prefer Fidelity’s Emerging Markets fund, which is as a great way to access the asset class; especially given its focus on quality companies and historically defensive return profile.”