Show Transcript
Emerging market tech stocks could be set to outperform in 2021 and beyond thanks to higher growth prospects. Anthony Okolie speaks with Christian Medeiros, Associate Portfolio Manager, TD Asset Management, about key secular trends in emerging market technology.
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- As COVID-19 vaccines continue to roll out around the world, investors betting on a continued economic rebound are increasingly looking at emerging markets where the pandemic has accelerated the adoption of digital technology. Here to talk about those emerging market opportunities is Christian Medeiros. He's an Associate Portfolio Manager at TD Asset Management. Christian, before we dive into the emerging market technology opportunities, what do you think is driving this bullish outlook for emerging markets in 2021?
- Thanks for having me today, Tony. So for emerging markets, generally, they're very sensitive to the global macroeconomic environment. And they tend to do very well in their early recovery. And the reason why is because a high share of the economy is tilted towards exports and towards commodities. And so in early recovery, when economies are in this case reopening, resulting in reflation globally, emerging markets tend to be one of the prime beneficiaries.
And the same is expected this time around. If you look at economic forecasts, emerging markets are expected to grow, let's say 5% next year, whereas the rest of developed markets are maybe 3% or 4%. And that growth is expected to continue beyond 2021 into 2022. And so that would be really consistent with the historic growth trajectory. And that's really driving the bullish outcome.
In terms of a little bit of risks that might challenge that outlook is the speed of vaccine rollout in emerging markets can be slower than developing markets. So that's one concern. And the other is that emerging markets have spent a lot of fiscally to prop up their economies. And they're in a bit of a worse fiscal shape. And so that's going to be one concern, how much firepower they have to restart and jumpstart their economies as we move forward into the reopening.
- So given that macroeconomic backdrop, talk to us about the incredible growth that we saw in online sales and transactions, particularly in emerging markets last year.
- Yeah, so when we think about emerging markets, just betting on them wholesale and betting on them for the cyclical recovery, you know, this is something that works out if you're a cyclical investor, and will work out at the beginning of every cycle. But those themes and those companies aren't necessarily sustainable investments over a long period of time. And so we really like the secular themes in emerging markets. And one of our favorite ones is the digitization of consumption in emerging markets.
And so we saw strong growth going into the pandemic. But during the pandemic, we really saw a huge acceleration in these themes. So for e-commerce, which is a major one, we saw essentially a doubling of e-commerce activity, and we saw many more users become comfortable with these services. We saw the providers rollout logistics that will enable them to deliver these goods and really make it easy to use e-commerce across these markets.
And so the result was extremely impressive profit growth-- sorry, revenue growth for these companies. And when you look at surveys of many emerging market countries, the consumers have started using these services, got comfortable with these services. They say that they're going to continue to use them. It's becoming stickier. And so this has really accelerated the growth outlook. And we and I think many market participants and observers now expect that e-commerce within emerging markets could actually triple in terms of size into 2025. And so that's a big speed up in what we expected versus prior to the pandemic.
- And where do you see the next leg of growth for some of these emerging market technologies?
- Yeah. So for these emerging market technology companies, especially what we call super-ops, where they offer e-commerce, they offer ride hailing, they offer a bunch of features, and really trying to capture that whole digital experience for the consumer, what we're seeing is that when you first launched e-commerce in these markets, a lot of people don't necessarily have traditional banking experience or touch points. 50% of many of these countries are unbanked. They don't have credit cards. And so it was difficult to transact online in many cases, and inconvenient.
And so a lot of these companies have launched e-wallets and financial services. And this is really a major, major, part of growth at this point. And if you look at MercadoLibre in Latin America, for example, their e-wallet in financial services has been really successful, to the point where it's a meaningful revenue driver for the company. And if you look at Southeast Asia, for example, Shopee, which is a part of Sea Ltd, another one of our favorite companies there, they just won a banking license in Singapore. And their e-wallet, and just e-wallets in general in Southeast Asia, are rapidly gaining acceptance versus cash.
And the beautiful thing, too, is that these e-wallets are also allowing people to use QR codes and pay in stores. So not only does it facilitate e-commerce, but it facilitates commerce offline, which will benefit from the reopening, and it facilitates democratization of financial services in these markets.
- Now, you mentioned some of those names in emerging markets. Are there any other names that you're watching closely in 2021?
- Yeah, so we continue, of course, like the super out names that we've mentioned before, MercadoLibre, Sea Limited, Yandex in Russia, Reliance in India. But we also like more of the pure play payments names because not only do they do well with e-commerce adoption, but they are increasingly rolling out modern payment architecture in stores as well. So an example that would be StoneCo in Brazil. Additionally, we liked infrastructure names before. They did quite poorly during a pandemic, but as things reopened-- these could be airports, these could be ports, these could be construction-- will all do well as well.
And lastly, we think that also hardware, especially within technology hardware, within Taiwan and Korea are really well poised, because they're leaders in chips. They're leaders increasingly in battery technology and some green technology as well. And as we think about the new themes where the infrastructure dollars are going to be spent and also the necessity of this tech hardware in the modern economy, that's an interesting place to look as well and has a bonus of being both secular and cyclical tailwinds.
- And finally, from an investor standpoint, what are some of the key trends that we should be keeping an eye on in 2021?
- Yeah, looking to 2021, a few things that I think are interesting. First is the persistence of a lot of these trends. The acceptance of e-commerce, the spread of fintech, the adoption of ride hailing and food delivery, these are things that are not going to go away in emerging markets. Consumers have become comfortable with them.
The major companies, since they've built such dominant market share, they've brought so many users and sellers onto the platform, they're in a much more stable position and are going to move towards profitability over the next few years. These are much more stable, durable companies than investors may have thought before. Further, I expect more IPOs. There's a lot of unicorns in this space that I think could IPO over the next year or two, as they need capital to compete with some of the bigger players. And so we see an expansion of those themes.
And I think the thing to just be wary of is while these tech themes we think are very powerful, over the next decade, over the next five years, they may take a little bit of a backseat to the strong cyclical rally that we might see amongst some of the other parts of the emerging market company space. So secular themes are very strongly intact for the next decade. I think they'll still be strong next year, but I think we might see a bit rotation when we look across EM equities over 2021.
Christian, thank you very much for your insights.
Thanks, Anthony. Pleasure to be here.
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- Thanks for having me today, Tony. So for emerging markets, generally, they're very sensitive to the global macroeconomic environment. And they tend to do very well in their early recovery. And the reason why is because a high share of the economy is tilted towards exports and towards commodities. And so in early recovery, when economies are in this case reopening, resulting in reflation globally, emerging markets tend to be one of the prime beneficiaries.
And the same is expected this time around. If you look at economic forecasts, emerging markets are expected to grow, let's say 5% next year, whereas the rest of developed markets are maybe 3% or 4%. And that growth is expected to continue beyond 2021 into 2022. And so that would be really consistent with the historic growth trajectory. And that's really driving the bullish outcome.
In terms of a little bit of risks that might challenge that outlook is the speed of vaccine rollout in emerging markets can be slower than developing markets. So that's one concern. And the other is that emerging markets have spent a lot of fiscally to prop up their economies. And they're in a bit of a worse fiscal shape. And so that's going to be one concern, how much firepower they have to restart and jumpstart their economies as we move forward into the reopening.
- So given that macroeconomic backdrop, talk to us about the incredible growth that we saw in online sales and transactions, particularly in emerging markets last year.
- Yeah, so when we think about emerging markets, just betting on them wholesale and betting on them for the cyclical recovery, you know, this is something that works out if you're a cyclical investor, and will work out at the beginning of every cycle. But those themes and those companies aren't necessarily sustainable investments over a long period of time. And so we really like the secular themes in emerging markets. And one of our favorite ones is the digitization of consumption in emerging markets.
And so we saw strong growth going into the pandemic. But during the pandemic, we really saw a huge acceleration in these themes. So for e-commerce, which is a major one, we saw essentially a doubling of e-commerce activity, and we saw many more users become comfortable with these services. We saw the providers rollout logistics that will enable them to deliver these goods and really make it easy to use e-commerce across these markets.
And so the result was extremely impressive profit growth-- sorry, revenue growth for these companies. And when you look at surveys of many emerging market countries, the consumers have started using these services, got comfortable with these services. They say that they're going to continue to use them. It's becoming stickier. And so this has really accelerated the growth outlook. And we and I think many market participants and observers now expect that e-commerce within emerging markets could actually triple in terms of size into 2025. And so that's a big speed up in what we expected versus prior to the pandemic.
- And where do you see the next leg of growth for some of these emerging market technologies?
- Yeah. So for these emerging market technology companies, especially what we call super-ops, where they offer e-commerce, they offer ride hailing, they offer a bunch of features, and really trying to capture that whole digital experience for the consumer, what we're seeing is that when you first launched e-commerce in these markets, a lot of people don't necessarily have traditional banking experience or touch points. 50% of many of these countries are unbanked. They don't have credit cards. And so it was difficult to transact online in many cases, and inconvenient.
And so a lot of these companies have launched e-wallets and financial services. And this is really a major, major, part of growth at this point. And if you look at MercadoLibre in Latin America, for example, their e-wallet in financial services has been really successful, to the point where it's a meaningful revenue driver for the company. And if you look at Southeast Asia, for example, Shopee, which is a part of Sea Ltd, another one of our favorite companies there, they just won a banking license in Singapore. And their e-wallet, and just e-wallets in general in Southeast Asia, are rapidly gaining acceptance versus cash.
And the beautiful thing, too, is that these e-wallets are also allowing people to use QR codes and pay in stores. So not only does it facilitate e-commerce, but it facilitates commerce offline, which will benefit from the reopening, and it facilitates democratization of financial services in these markets.
- Now, you mentioned some of those names in emerging markets. Are there any other names that you're watching closely in 2021?
- Yeah, so we continue, of course, like the super out names that we've mentioned before, MercadoLibre, Sea Limited, Yandex in Russia, Reliance in India. But we also like more of the pure play payments names because not only do they do well with e-commerce adoption, but they are increasingly rolling out modern payment architecture in stores as well. So an example that would be StoneCo in Brazil. Additionally, we liked infrastructure names before. They did quite poorly during a pandemic, but as things reopened-- these could be airports, these could be ports, these could be construction-- will all do well as well.
And lastly, we think that also hardware, especially within technology hardware, within Taiwan and Korea are really well poised, because they're leaders in chips. They're leaders increasingly in battery technology and some green technology as well. And as we think about the new themes where the infrastructure dollars are going to be spent and also the necessity of this tech hardware in the modern economy, that's an interesting place to look as well and has a bonus of being both secular and cyclical tailwinds.
- And finally, from an investor standpoint, what are some of the key trends that we should be keeping an eye on in 2021?
- Yeah, looking to 2021, a few things that I think are interesting. First is the persistence of a lot of these trends. The acceptance of e-commerce, the spread of fintech, the adoption of ride hailing and food delivery, these are things that are not going to go away in emerging markets. Consumers have become comfortable with them.
The major companies, since they've built such dominant market share, they've brought so many users and sellers onto the platform, they're in a much more stable position and are going to move towards profitability over the next few years. These are much more stable, durable companies than investors may have thought before. Further, I expect more IPOs. There's a lot of unicorns in this space that I think could IPO over the next year or two, as they need capital to compete with some of the bigger players. And so we see an expansion of those themes.
And I think the thing to just be wary of is while these tech themes we think are very powerful, over the next decade, over the next five years, they may take a little bit of a backseat to the strong cyclical rally that we might see amongst some of the other parts of the emerging market company space. So secular themes are very strongly intact for the next decade. I think they'll still be strong next year, but I think we might see a bit rotation when we look across EM equities over 2021.
Christian, thank you very much for your insights.
Thanks, Anthony. Pleasure to be here.
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