Some tech companies are not only surviving the pandemic, but are actually thriving as consumers in lockdown go online. Anthony Okolie speaks with Christian Medeiros, Associate Portfolio Manager, TD Asset Management, about tech companies in emerging markets that are stepping up.
- Christian, so far 2020 seems to be about technology's performance in North American markets. In the US, of course, tech stocks are outperforming the wider markets. The NASDAQ closed above 10,000 for the first time ever. What has been experienced for technology stocks in emerging markets?
- Thanks, Anthony. It's really been a global phenomenon. I mean, last time we spoke, we spoke about how some emerging market technology companies were really trying to transform their countries into digital economies. And what COVID's done is really accelerate that trend. And we see the performance of the companies that we follow wildly outpacing the EM benchmarks, but even outpacing their technology peers in the developed markets, as well.
- And just talking about COVID, how did the experience of the emerging markets compare with the West with regards to government lockdowns, as well as government fiscal support for the economy?
- Yeah, so for many emerging markets, particularly those in the medium- to low-income countries, they don't have the same health capacity that we do in terms of ICU beds. They may be harder for them to do testing and contact tracing. And they also tend to be much more dense populations, making social distancing harder.
So many of these countries locked down in stricter and more stringent ways than we had here in some of our developed country peers, including curfews, stay-at-home orders, et cetera, while at the same time they lack some of the fiscal capabilities to maintain those lockdowns. So they had a much harder experience than we had with also less infrastructure to manage through that pain.
- Let's talk about the acceleration of technology. Is it being adopted faster in emerging markets versus the West?
- Yeah, so if we look at emerging markets, we see that there's about 5% penetration rate for e-commerce, for example, whereas globally, it's about 15% penetration. But the growth rates in emerging markets are maybe 20%, 30%, which far outstrip what we're seeing in developed markets. We also saw an acceleration of that trend because of COVID.
So McKinsey estimated that these consumer technology trends were maybe pulled forward by five years in developed markets. But The Times of India had a good piece talking about how it pulled forward these trends in emerging markets by maybe 20 years. And we're seeing that when we look at a lot of the releases and quarterly reports from the companies we follow, such as Sea Limited, or MercadoLibre, where they're saying that this is a sustained and meaningful trend in accelerating these technological shifts.
- Now, when we look at the West, technology companies like Amazon, of course, Shopify, have really thrived at during the COVID-19 pandemic. Who are some of the winners in the emerging markets, and how do they compare?
- Yeah, so the names that we like tend to be ones that are really capturing the entire digital economy, capturing that whole digital lifecycle. So companies, like MercadoLibre, Sea Limited, that have e-commerce. They have fintech. They also tend to have entertainment.
So for example, for Sea Limited, on their e-commerce business, they saw great adoption and expansion during the quarter during COVID. But what they also saw is, because it's a marketplace, they're able to quickly shift their product mix towards staples and health care products that were hard for consumers to get because of the lockdowns. So they really met those needs, and they think that they gained many loyal customers.
If you look on the fintech side, for MercadoLibre, who is trying to build out a really strong fintech arm within Latin America, we see that there is huge adoption by new sellers that came to the platform because they could no longer sell offline. And even their existing customers and clients, they started to adopt mobile wallets. And this is really becoming a threat to companies like Visa or Mastercard, potentially.
Lastly on entertainment, Sea Limited has one of the most popular mobile games globally, particularly in Southeast Asia. And so people are stuck at home. They need something to do. They had over 400 million unique quarterly users playing their most popular mobile game. So really across your digital lifestyle, which was, if you will, forced upon us over the last quarter, we saw great adoption for each of the segments of these companies.
- Given all this, what's your near and long-term outlook for technology firms in emerging markets?
- Yeah, so, again, when we last talked, we were quite confident in our conviction for the digitization of economies, particularly on the consumer side, over the next 10 years. I think given the pull for that we've seen that we're even more confident now than we were before, as are the management teams of these companies.
When it comes to the short-term, these stocks have had massive runs-- up maybe 100% a year for some of the names. So there's a chance that there may be a short-term pullback, particularly if investors try to rotate into more of the cyclical names within emerging markets as economies recover. But over the long term, our conviction is as strong as it's ever been.
- Christian, thank you very much for your time.
- Thank you.