Emerging markets are beginning to take the lead from developed markets in a range of technology sectors, according to Carlos Hardenberg of Franklin Templeton Investments.
Hardenberg, the manager of the £29.7m Templeton Global Emerging Markets fund alongside Chetan Sehgal, said innovation in the sector and early adoption have driven growth of technology stocks in Asia, Latin America and Russia.
Indeed, technology stocks have been part of the reason for the strong performance of MSCI Emerging Markets index, according to consultancy Capital Economics, which notes that the sector forms a significant part of the index.
Hardenberg said: “The IT sector in general, be it software producers, developers, hardware component producers, all the way to the software producers, in emerging markets have really changed the landscape in emerging markets dramatically.
“So if you look at Korea, Taiwan, China but also Latin America, Russia and some of the smaller African countries, that’s where the music plays, that’s where the innovation takes place and the businesses are moving into. That’s where the future opportunities lie.”
Performance of MSCI Emerging Market indices over 5yrs
Source: FE Analytics
Hardenberg said a number of traditional industries are also embracing technology much more rapidly than developed markets have.
He explained: “So it’s global, it’s moving fast and we are seeing consumer habits in emerging market are kind of more flexible than in the old world.
“If you look at China, China never built up the same capacity in terms of malls and all that that we have in the US.
“They went very quickly into e-commerce so a lot of the transactions in the grocery area or any other aspect of the day-to-day purchasing activity of consumers is in the internet. As a matter of fact, 20 per cent of global internet consumption is in China.”
However, as well as being great adopters of technology – both from a consumer and a business perspective – emerging markets are beginning to challenge the supremacy of developed countries.
The manager said that a lot of the technology innovation previously dominated by Germany, US and the UK was now shifting towards emerging markets: “If you look at the innovation in technology in wind turbines, innovation in technology in alternative energy providers is developed in emerging markets.”
He added: “Probably one of the biggest and most transformational industrial developments that we will witness is the move from the combustion engine and cars driven by people to battery-powered vehicles that are no longer being driven by people but by robots.
“All the solutions from battery cooling to batteries themselves to lightweight structural components with software to network integration is coming from emerging markets. It’s not coming from Stuttgart or Detroit but emerging markets.
“This is where we are positioning the portfolios so that we can benefit from this very big global trend.”
Hardenberg added: “The new iPhones will be based on surface technology which is based on organic LEDs and it is entirely occupied by Samsung which has 95 per cent of that surface technology.
“It will take quite a long time for others to come in and they will be able to protect their margin for quite a long time and they will be able to enjoy their leadership in that technology and supply not just to Apple but to everyone.”
Another part of the technology sector where Hardenberg sees increased competition from emerging markets firm is the semi-conductor market, which has been dominated by developed market providers.
Hardenberg said though it is a part of the industry that is well understood, the demand for memory could soar as internet of things and driverless cars become more prevalent.
“If you look at the market today and compare it to five to six years ago it used to be a market that was very fragmented which was very US-centric,” the manager said.
“Now the US market is dominated by emerging market companies like Samsung and on the processing side it is really Taiwan Semiconductor which is based out of Taiwan.
“So these are incredible opportunities in emerging markets and it is important to acknowledge the fact that we’ve come a long way from cement and traditional telco businesses to what we are looking at right now.”
The IT sector represents 27.06 per cent of the fund – the largest sector exposure – compared with a 26.63 per cent weighting in the MSCI Emerging Markets benchmark.
The fund’s top holdings include several high conviction technology stocks. Samsung Electronics is the fund’s second largest holding representing 6.86 per cent of the portfolio.
Elsewhere, Taiwan Semiconductor Manufacturing Company and South Korean firm SK Hynix represent 5.1 per cent and 1.76 per cent of the fund respectively. Also in the top 10 stocks is Chinese firm Alibaba, which has a 4.16 per cent weighting in the portfolio.
Hardenberg and Sehgal took over as managers of the fund earlier this year, following the announcement that veteran emerging markets investor Mark Mobius would be stepping back from day-to-day management duties.
Performance of fund vs sector & benchmark over 3yrs
Source: FE Analytics
Over three years the fund has underperformed the sector and index, delivering a return of just 26.85 per cent, compared with a 37.4 per cent rise in the benchmark and a 35.84 per cent rise for the average IA Global Emerging Markets peer.
The fund an ongoing charges figure (OCF) of 1.2 per cent.