12 Jul 2019
From Imitation to Innovation
Many investors have a view of emerging markets that remains stuck in the past, and that’s particularly true in the realm of technology. No longer simply copying advances made in the developed world, emerging market companies are now leading the way with growing research and development budgets and eye-catching innovations. Franklin Emerging Market Equity Group’s Chetan Sehgal and Andrew Ness offer their thoughts on this developing trend.
As we travel around the world meeting business leaders and investors, we’ve cemented our view that emerging markets equity today is a very different asset class from when we started our careers some 25 years ago.
There are few better illustrations of that evolution than the central role innovation and the use of technology now play in emerging markets. But it’s clear from our research that understanding of the potential opportunity in these areas continues to elude many investors.
We see a huge amount of innovation and proprietary knowledge coming through from emerging markets.
While many investors expect emerging markets to follow the development path of more advanced markets, in reality we are witnessing companies seize the lead in innovation and leapfrog the more advanced economies in areas such as e-commerce, digital payments, mobile banking and electric vehicles. Innovative companies are turning previous structural weaknesses into strengths.
Unhindered by sunk investments in legacy systems or infrastructure, they have ample room to come up with forward-thinking and profitable solutions.
The most high-profile example is China, where companies have developed from a replication and simulation approach to leading with their own proprietary research and development (R&D) spend to differentiate themselves from Western products.
A new generation of affluent and savvy Chinese consumers, faced with a lack of retail stores and malls, began turning to their smartphones to purchase goods online. Today, e-commerce makes up a far higher percentage of retail sales in China than in the United States.
A similar trajectory can be seen in digital payments, where the slow development of credit card systems has prompted a consumer migration to online payment platforms such as Alibaba’s Alipay and Tencent’s WeChat Pay.
Alipay, for example, had a total third-party payment market share of 50% in December 2018 (total payment volume), while WeChat Pay also held a 35% share—with the latter expected to reach 40% market share by the end of 2019.1 Digital payments have now become commonplace across China, and the value of its digital payment market is multiple times that of the United States.
Made in China: Outdated Stereotypes of Emerging Market Exports Remain
Despite emerging market product advancements in many areas, a recent survey carried out on behalf of Franklin Templeton’s Emerging Market Equity Group suggested UK investors remain hesitant about the value and quality of some emerging markets exports, with many holding outdated stereotypes of products and services “Made in China.”
More than half of investors surveyed considered Chinese exports to be “cheap” (53%), with some also describing them as “poorly regulated” (38%) and “low quality” (29%).2 By comparison, most respondents described UK exports as “well-regulated” (62%) and “reliable” (57%), whilst Japanese products were considered to be both “high quality” (58%) and “innovative” (52%).3
Where once emerging markets economies achieved initial success as producers of cheap home appliances or electronic parts, for example, many of these economies have now set their sights further up the value chain. Indeed, with China and South Korea as leading examples, emerging markets’ share of global high value-add exports has risen dramatically since the start of the 21st century, rendering this impression of survey participants out of step with reality.
Of course, progress is uneven across emerging markets and we should not downplay the challenges that certain countries still face in their development. This is where we believe on-the-ground research and an active investment approach become critical.
We think some of the most disruptive innovations have hailed from emerging economies, and we expect them to continue to leap ahead in an increasing number of areas. Certain companies have shown exceptional agility in solving consumers’ problems, and those that can continue to do so are likely to enjoy sustainable earnings growth.
Important Information
For Professional Client Use Only. Not for Distribution to Retail Clients.
© Copyright 2019. Franklin Templeton Investments. All rights reserved. This document is intended to be of general interest only and does not constitute legal or tax advice nor is it an offer for shares or an invitation to apply for shares of any of Franklin Templeton Investments’ fund ranges. Nothing in this document should be construed as investment advice. Franklin Templeton Investments has exercised professional care and diligence in the collection of information in this document. However, data from third party sources may have been used in its preparation and Franklin Templeton Investments has not independently verified, validated or audited such data. Opinions expressed are the author’s at the publication date and they are subject to change without prior notice. Given the rapidly changing market environment, Franklin Templeton Investments disclaim responsibility for updating this material. Investments entail risks. The value of investments and any income received from them can go down as well as up, and investors may not get back the full amount invested. Past performance is not an indicator, nor a guarantee of future performance. Currency fluctuations may affect the value of overseas investments. When investing in a fund denominated in a foreign currency, performance may also be affected by currency fluctuations. In emerging markets, the risks can be greater than in developed markets. Any research and analysis contained in this document has been procured by Franklin Templeton Investments for its own purposes and is provided to you only incidentally. Franklin Templeton Investments shall not be liable to any user of this document or to any other person or entity for the inaccuracy of information or any errors or omissions in its contents, regardless of the cause of such inaccuracy, error or omission. For more information about any Franklin Templeton Investments’ fund, UK investors should contact: Franklin Templeton Investments, Telephone: 0800 313 4049, Email: ftisalessupport@franklintempleton.co.uk or write to us at the address below. Alternatively, the information can be downloaded from our website www.franklintempleton.co.uk. Issued by Franklin Templeton Investment Management Limited (FTIML) Registered office: Cannon Place, 78 Cannon Street, London EC4N 6HL. FTIML is authorised and regulated by the Financial Conduct Authority.