After an incredibly strong multi-year streak, investors may be wondering whether the bull run in technology stocks is about to grind to a halt.
Some investors, pointing to US leaders such as Amazon (AMZN) and Google (GOOGL), say valuations in the sector are stretched. They believe these stocks are to blame for the American market being widely viewed as over-valued. Then there’s the problem of regulation, which looks likely to become more robust in the coming years.
However, technology stocks can continue to climb, according to Pictet Asset Management – but the rise will be led, not by the so-called FAANGS, but by new names in emerging markets.
There’s been a major shift in the make-up of the MSCI Emerging Market index, according to Devan Kaloo, global head of equities at Aberdeen Standard Investments: the information technology sector accounts for 27.8% of the index, compared with just 12.9% in 2010. Back then, energy stocks took up 14.3% of the index – a number which has since halved.
It’s a positive change for emerging markets, Kaloo explains, making them less dependent on the price of commodities and, as a result, less volatile. This could be of great benefit to performance – Pictet says non-developed market equity asset classes are likely to be the best-performing regions over the next five years.
The investment house is forecasting 10% annual returns from Frontier markets and Emerging Asia equities, and 9.7% from Emerging Market equities. Not far behind, it is expecting annual returns of 7.6% from Latin American equities. The firm believes Emerging Market local currency debt will lead fixed income returns too.
Within that, it will be the IT sector which drives returns, according to Pictet senior multi-asset strategist Supriya Menon, despite the fact it has underperformed so far – the MSCI EM Information Technology index has returned 94% in US dollar terms over the past five years, compared with 135% from the Dow Jones Technology index, according to Morningstar Direct data.
Emerging Market Tech at a Discount
Over shorter timeframes the difference in performance is much closer and, on Pictet’s forecasts, emerging market tech returns are expected to be double what we get from developed markets in the next five years. As a result, Menon estimates that emerging market tech is trading on a 25% discount to its developed market counterpart.
She likes the Chinese ecommerce names that dominate the index – the likes of Alibaba (BABA) and Tencent (00700) – but says the fastest growing ecommerce region behind Asia is Latin America, where stocks include Argentina’s MercadoLibre (MELI).
Elsewhere, blockchain technology is an area of growing interest – Venezuela is the first nation to have launched a virtual currency. James Thomson, manager of the Morningstar Silver Rated Rathbone Global Opportunities fund, generally doesn’t invest in emerging markets due to it being one of the most economically sensitive areas around.
However, he does have a stake in Tencent, the Chinese tech conglomerate. The stock accounts for almost 3% of his £1.3 billion fund and is the only non-US firm in the top 10 holdings. While tech accounts for more than a quarter of the portfolio, Tencent is his sole emerging market holding in the sector.
That’s despite the fact he believes that, in many ways, Asian tech is way ahead of the West, particularly in terms of payment networks. “No-one carries cash in China now – everybody’s paying for everything on their phones either through Tenpay or Alipay,” Thomson explains.
The fund manager invested in Tencent, which is currently the largest firm in Asia and the best-performing stock in his portfolio, at its IPO in 2004 and says he’s happy to outsource his China exposure to management who are “experts in dealing with a very nuanced market”. He adds: “They’re the ones doing it and I’m backing their skills, essentially.”
After making gains, Thomson “foolishly” sold the stock about a year after it listed on the stock market but says he “wisely swallowed our pride and bought it back, thankfully. It’s one of the most innovative and exciting companies in the world.”
Alibaba, too, was bought by the fund at its flotation in 2014 and, again, sold “foolishly” due to fears around its transition from desktop to mobile in its early days. But, unlike Tencent, he did not re-invest. He says: “I guess we feel like we’ve got the great champion in Asian internet, why double up and chase it? In Tencent, we think we’ve got a gold-standard, world-beating internet business in China and we’re happy to continue to back it.”
