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October 2020 / VIDEO

EM Gives Silicon Valley a Run for its Money

With the onset of rapid mobile phone adoption and the triumph of the internet, emerging markets in Asia are reinventing themselves

Emerging markets in Asia are reinventing themselves. With the onset of rapid mobile phone adoption and the triumph of the internet, we have witnessed huge change.

Today, emerging markets are pioneers of up-and-coming technologies, spanning everything from artificial intelligence and digital currencies to mobile banking and healthcare. Developed countries are no longer the sole drivers of technological innovation. Now, the digital transformation that is taking place on a worldwide level also has its roots in emerging economies.

Mobile health, for example, represents one area where emerging markets are excelling. According to a study by PwC, mobile health applications are far more established in emerging countries, where 59% of patients are already using at least one such service. In contrast, the adoption rate in developed economies lies at 35%. With 35% in emerging markets versus 23% in wealthier countries, doctors are also more willing to include mobile apps into their daily work, for example by analysing general health data gathered by their patients’ mobile devices.

The boom of the overarching technology industry constitutes a success story for emerging markets.

The boom of the overarching technology industry constitutes a success story for emerging markets. After having followed in the footsteps of more established entities from developed countries for years, emerging market companies have made the leap from copycats to innovators.

Asian firms are at the forefront of that development, with China, South Korea and Taiwan taking the lead. The region’s high growth rate in the technology sector derives, in part, from the lack of a traditional retail economy. Brick-and-mortar stores, for example, never held the same significance in these countries as they did in other parts of the world. Correspondingly, the market represented an ideal hotbed for e-commerce companies, which stepped in to fill the gap.
 

South Korea is home to the world’s top R&D investor

Additionally, research and development (R&D) departments benefit from a large influx of money. Chinese companies, for example, are already investing more in R&D than their European counterparts, which fuels their rising dominance in the market.

The firm with the highest R&D spending, however, is based in South Korea. In 2017/18, Samsung allocated US$14.61bn (£11.77bn) to R&D, $50m (£40m) more than the second-placed US conglomerate Alphabet. This is according to a report by the European Commission, which analysed the financial data of 2,500 businesses worldwide.

The gaming industry represents another growth area in China’s technology sector, which has become one of the largest online gaming markets in the world. Against this background, it comes as no surprise that the country is home to some of the biggest video game companies, including Tencent, NetEase and Shanda.

China is also a strong contender for the lead in artificial intelligence (AI). In fact, the nation is racing to become a dominant force in AI within the next decade. According to the State Council, China aims to be a ‘global innovation centre’ in this field by 2030.

Companies such as Alibaba, Baidu and Tencent, which are well established in areas including online games, e-commerce, social media and online search, are ramping up their AI capabilities. As a side effect, machine learning technologies, which aim to improve the quality of search results and streamline payment processes, are also gaining importance.
 

Innovation is rising sharply

‘We expect Chinese companies to narrow the AI gap with their US counterparts quite significantly over the coming years,’ Gonzalo Pángaro, portfolio manager for global emerging markets at T. Rowe Price, says. ‘Chinese businesses have ample government support in terms of regulation and research funding, abundant engineering talent, deep pools of private sector investment and large amounts of digital data for deploying machine learning techniques to existing products,’ he adds.

For investors, however, it is important to identify companies that can innovate at the right pace to generate the best earnings growth in the years ahead.

South Korea, on the other hand, is ahead of the pack in the development of semiconductors. To further strengthen the country’s foothold in the area, President Moon Jae-in announced plans to boost the nation’s semiconductor sector by investing US$855.5m (£689.3m) into the industry.

More than 900 miles south lies a hotspot for the production of optical lenses, especially camera lens sets for smartphones. Taiwan is home to the headquarters of some of the most prestigious lens providers, including Largan Precision and Genius Electronic Optical. The country’s technology industry is also among the frontrunners in the information and communications technology sector.

Emerging markets are a melting pot of innovation. Nowhere is this more obvious than in the technology space where economies are leapfrogging straight to the latest solutions, instead of taking a detour over already outdated products. We believe that the coronavirus pandemic will only accelerate that process.

For investors, however, it is important to identify companies that can innovate at the right pace to generate the best earnings growth in the years ahead, Pángaro says.

He explains that the rise of technology companies and the innovation they are driving within emerging markets represents a meaningful shift in direction that might still be underappreciated by the market. ‘A lot of people think that emerging markets are just mimicking US companies, with Alibaba and Tencent as the eBay and Facebook of China. This does not reflect the reality though. Emerging markets companies became successful in their own right and in many cases are leading innovation.’

IMPORTANT INFORMATION

This material is being furnished for general informational and/or marketing purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, nor is it intended to serve as the primary basis for an investment decision. Prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.

The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.

Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources' accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date noted on the material and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.

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A diversified portfolio of approximately 90-120 emerging markets stocks, unconstrained by country, sector, or market cap. We aim to identify high quality companies with long-term sustainable above-market earnings growth, at prices that do not fully reflect that growth.
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$2.6b

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