HUB EXCLUSIVES PANEL DISCUSSION
Panel discussion, hosted by Cherry Reynard, with:
Qian Zhang, Investment Specialist, Emerging Market Equities, Baillie Gifford
Jen Ford, Investment Director in the 4Factor team, Ninety One
For more than a decade, investors have been focused on a single growth theme – AI – and on a single country – the US. Emerging markets not only have exposure to the AI supply chain, but to a wealth of other growth themes, which have been neglected by investors in the rush for the US mega caps. These are the key growth themes that fund managers are exploring in emerging markets.
Semiconductor supply chain
Asia is home to a large part of the semiconductor supply chain, including those used for AI. This has seen significant growth over the past 12-18 months as investors have started to look beyond the US for cheaper options to access the AI trend.
Jen Ford, investment director in the 4Factor team at Ninety One, says: “The companies enabling AI growth are rooted in Asia - whether it’s the picks and shovels infrastructure players, or the resources players that are providing cooling solutions for data centres, or companies are integrating and adopting AI into their operating models.”
Qian Zhang, investment specialist, emerging market equities at Baillie Gifford, says the semiconductor supply chain is complex, incorporating memory chip producers, analogue chip designers, and all sorts of equipment manufacturers, plus testing equipment to manufacturers of data centres. “When you have strong leaders on the manufacturing side, it lifts up the whole ecosystem. Lots of companies are developing niche products that are dominating market share.”
She points out that China wants to achieve self-sufficiency in chip manufacturing. “China’s domestic chip-producing capabilities have doubled in recent years and there’s still a long way to go.”
Clean energy
China has become increasingly dominant in a range of green energy sectors such as batteries and electric vehicles. However, Zhang says: “It is important to identify where the true value will accrue. EVs are a super-competitive market. Only one in 13 of Chinese EV brands will become profitable by the end of this decade. It’s hard to say who will be the final winners and whether the profit margin can be sustained.”
She believes there is more value in investing in the component parts for batteries or electric cars. She adds: “Data centres need a lot more ‘stuff’ – like minerals. A lithium battery weighs 150kgs and includes 11kgs of lithium, nearly 14kgs of cobalt, and 40kgs of copper. The world needs a lot more of this ‘stuff’, but it takes time to build mines, and capex has been very limited. That’s a great opportunity to be exposed to.”
Consumption
As emerging markets build wealth, consumption patterns change. Historically, this has taken the form of premiumisation – consumers moving to higher-end brands and products. However, Ford says this is changing: “In the current environment, Chinese consumer sentiment is pretty weak. What we’ve noted is not that the consumption opportunity set has not gone away, but that it has transformed.
“Consumers are spending differently. They are not buying properties and cars, but spending on areas such as domestic travel and collectable figurines. Two of the companies we own that have performed well because they are tapped into these two trends.”
Supply chain reengineering
The unpredictability of the geopolitical situation has prompted companies to reconfigure their supply chains. Some of this has been away from China, but it is not the only story. Zhang says that while it is clear that the golden age of globalisation is over, this is not necessarily bad news for emerging market companies.
She adds: “We see that Chinese companies have spent years – since the first trade war – trying to deal with this deglobalisation. Most of the Chinese companies we meet are doing two things: they are doubling down on going global – setting up factories in South East Asia, Latin America or Europe and they are trying to bring their own supply chain closer to home.
“Companies in China now sell more to the Global South than the Global North. China is the largest car exporter in the world, but 75% goes to emerging markets. In reality, it is not a deglobalisation story, it is a decoupling between US and China.”
She sees three clear beneficiaries: there are countries in the middle that can trade with both sides. India and several other countries in South East Asia and Latin America would have these advantages. Countries with big domestic consumption markets also stand to benefit. This includes China, India and Indonesia. The other winners are those that have assets that no-one else has, such as specific commodities.
Smaller markets
While China, India and South East Asia dominate the headlines around emerging markets, Ford believes the Middle East is an unsung hero. She says: “This is a region where we’re seeing a lot of growth and it’s rising in strategic importance. The UAE, for example, is open to trade, and has signed a number of important trade agreements over the last two to three years.
“With that openness to trade comes openness to immigration. The UAE has issued golden visas, not necessarily tied to work, but as a way to encourage immigration which drives growth and innovation in the region. That has an impact on domestic sectors such as property.”
Emerging markets have been overlooked in recent years amid the vogue for US assets. However, as US exceptionalism is called into question, investors may start looking more closely at the growth options available within the asset class.
