Small companies can lead to mighty investment opportunities. Here’s a look at why Franklin Templeton Emerging Markets Equity’s Chetan Sehgal, Krzysztof Musialik and Jordan Pong are excited about smaller companies today.
COVID-19 Shifts Emerging Market Trends into Overdrive
Global equity markets remain enamored with technology giants despite seismic disruptions from the coronavirus. So far this year, market valuations for some industry titans have soared, albeit with some recent volatility. The same holds for a select few of Asia’s e-commerce and tech giants.
Since COVID-19 has emerged, the pace of digitization has noticeably increased, with more consumers shifting consumption from brick-and-mortar shops to online. We continue to see emerging market firms cultivate innovative environments, particularly those with small market capitalizations (caps).
Emerging Market Firms Spark Innovation
The global pandemic has now fast-tracked some emerging trends. We believe smaller companies are situated at the cusp of transformative investment themes with some strong tailwinds. Despite recently lagging businesses with a larger market cap, we think the current environment is fertile ground for small-cap opportunities, particularly in companies tightly aligned with macro trends.
We’ve observed two accelerating trends:
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Biometric wearable technology. This trend lies at the intersection of wearable technology and early COVID-19 detection. The pandemic has spurred people to become more aware of their overall health, driving the demand for wearable monitors that measure respiratory rates or even heart-rate function via electrocardiogram (ECG). While fitness bands and smartwatches share some basic smartphone features, they are still categorized separately. That said, the lines are becoming increasingly blurred between everyday wearables and specific medical devices.
A prominent Chinese cloud-based healthcare services provider recently released its second-generation wearable artificial intelligence (AI) chip which places sophisticated algorithms directly on the wrist or inside the ear. The next-generation chip can detect atrial defibrillation, an irregular heart rhythm, seven times faster than the previous model, and 26 times quicker than similar algorithms.
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Consumer premiumization. As COVID-19 has scrambled how white-collar professionals commute to work, we examine how permanent infrastructure changes in many large European cities are making electric “e-bikes” a key strategy to combatting climate change.
E-bikes, which have battery-run motors to assist pedaling, at times outpace public transport. While e-bikes are generally cheaper to run than cars, they are typically three times the price of traditional bikes and thus we think merit a position in the consumer premiumization theme. Mid- to higher-end designs include ultra-light frames, custom motor options controlled through a smartphone app, and regenerative braking, a system that recoups wasted energy while stopping.
We see some truly innovative developments in emerging markets small-cap companies, some which we consider have greater long-term potential compared with larger peers. Smaller companies are generally primed to take advantage of changing trends and events as they tend to be more agile, which strengthens our investment case. While COVID-19 has reinforced our positive outlook for e-commerce giants, it has also accelerated some tailwinds supporting smaller companies.
What Are the Risks?
All investments involve risks, including possible loss of principal. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments; investments in emerging markets involve heightened risks related to the same factors. To the extent a strategy focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a strategy that invests in a wider variety of countries, regions, industries, sectors or investments. The technology industry can be significantly affected by obsolescence of existing technology, short product cycles, falling prices and profits, competition from new market entrants as well as general economic conditions. Smaller and newer companies can be particularly sensitive to changing economic conditions. Their growth prospects are less certain than those of larger, more established companies, and they can be volatile.
The companies and case studies shown herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The opinions are intended solely to provide insight into how securities are analyzed. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio. Factual statements are taken from sources considered reliable, but have not been independently verified for completeness or accuracy. These opinions may not be relied upon as investment advice or as an offer for any particular security. Past performance does not guarantee future results.
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The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. All investments involve risks, including possible loss of principal.
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