Emerging-market tech stocks, concentrated in China, have held up better than their U.S. counterparts in the recent market correction. The Emerging Markets Internet & Ecommerce exchange-traded fund (ticker: EMQQ) has fallen 9% since Sept. 1, compared to 13% for the iShares U.S. Technology ETF (IYW). Year-to-date, the emerging market ETF is up 44%, against 23% for the U.S. tech basket.
That’s giving emerging-market investors something to brag about after years of under-performance, but also got them looking beyond the high-flying Chinese internet for future returns. “We’ve been trying to maintain some more balance, not go all in on the Chinese tech names,” says Brian Bandsma, emerging market equities portfolio manager at
Twin Chinese giants Alibaba Group Holding (BABA) and
(700.Hong Kong) still look to be on solid ground, despite year-to-date gains of 26% and 34%, respectively. They remain cheap relative to U.S. peers. E-commerce king Alibaba trades at about 24 times trailing earnings, compared to more than 80 for
(AMZN). “With a marketplace four times larger than the U.S. that’s a pretty compelling case,” says Albert Brenner, director of asset allocation strategy at People’s United Advisors.
The dominant Chinese players also have more room to grow, argues Dara White, global head of emerging markets equity at Columbia Threadneedle Investments. Tencent, for instance, hits users of its Moments social media platform with just four ads a day, compared to 25 for U.S. counterpart
(FB) – lots of runway to milk more revenue.
But second-tier Chinese tech stocks like e-commerce rivals
(JD) and Pinduoduo (PDD), and food-delivery champion
(3690. Hong Kong) have all doubled this year, entering nosebleed territory that is pushing investors into alternatives. Columbia’s White has his biggest country overweight in Brazil, where he is focused on a newer wave of innovators like e-commerce platform
(MELI), payments providers
(MGLU3.Brazil), a traditional retailer shifting rapidly online. “You’re not buying Brazil, you’re buying these excellent companies that weren’t even listed a few years ago,” he says.
Vontobel’s Bandsma favors Indian IT outsourcers like
Tata Consultancy Services
(HCLT.India). He’s also dipping into some beaten-down old-economy stalwarts in Latin America, like Mexican drinks provider
Fomento Economico Mexicano
Walmart de Mexico
(Walmex.Mexico) and Brazilian brewer Ambev (ABEV). In June, Barron’s pointed out a number of these companies were poised to keep climbing.
Notably absent from the conversation is anxiety over U.S.-China trade tensions, which have drove Chinese share movements. Washington’s fitful moves against particular companies won’t stop China reaping its share of the approaching booms in 5G telephony and cloud computing, says Mehdi Hosseini, senior equity analyst at Susquehanna International Group. “You’re definitely seeing a rebound in Asian 5G investment, and cloud should come back by spring of next year,” he says.
More broadly, China’s superior performance controlling and rebounding from the Covid-19 pandemic has made it look less vulnerable to economic attack. Exports to the U.S. amount to a mere 3% of Beijing’s gross domestic product at this point, Columbia Threadneedle’s White notes.
Blockades of key technologies like semiconductors might delay, but not reverse, China’s technological ascendancy, People’s United’s Brenner thinks. “We can hurt the Chinese economy, but not so much as to change the prospective landscape for investors,” he says.
Whether some of the hot stocks are worth their current prices is another question.