Quick Thoughts: New Realities in Emerging Markets

Emerging market (EM) economies are not what they used to be. Our Chief Market Strategist and Head of Franklin Templeton Investment Institute, Stephen Dover, discusses EM disruption, transformation, and digitalization themes, and why he sees a multitude of potential innovation investment opportunities in EM markets today and in the years ahead.

Emerging market (EM) economies are not what they used to be. They evolved away from cyclical, commodity-oriented, and state-owned companies toward developing intellectual property, pioneering technology-based companies, and building new business models driving greater earnings sustainability. We see three sub-themes of innovation powering EM: disruption, transformation, and digitalization.

  • Disruption: New technologies and business models are creating tectonic shifts.
    • China leads solar glass production globally and generally utilizes natural gas instead of carbon-heavy production methods.1 Solar electricity costs and production are now competitive with coal, yet with fewer carbon emissions.
  • Transformation: Agile EM companies are adapting to a changing world, creating disruption, or responding to it. Investment opportunities may include banks and “old economy” stocks utilizing innovative technology to pivot to new products.
    • For example, the South Korean companies that spearheaded the development of electric vehicle (EV) batteries are now the top-producing EV battery manufacturers and lead EV battery penetration worldwide.
  • Digitalization: The companies that enable our data-driven world provide essential online and offline infrastructure, including semiconductors, cloud computing, data centers, internet-of-things, artificial intelligence (AI), and 5th generation (5G) technology.
    • Semiconductor manufacturing companies in Taiwan and South Korea, for example, dominate globally due to their strong manufacturing capabilities, clout, and cash generation that widen their competitive advantages amid booming chip demand for computing, cryptocurrency mining, autos, appliances, and other businesses.
  • The Consumer Discretionary, Consumer Staples, IT & Communication Services, and Health Care sectors now constitute the majority of the MSCI EM Index, displacing the “old economy” sectors of Materials, Energy, and Industrials that peaked in 2008.2
  • Digital transformation and its multitrillion-dollar opportunities are still in their early days. Digitizing consumer experiences accelerated further due to the pandemic.

As investors look for innovation, they should consider EM. We foresee a multitude of potential investment opportunities in the years ahead. For more, please read “Emerging Markets: The Post-Pandemic Promise” by Chief Investment Officer Manraj Sekhon, Franklin Templeton Emerging Markets Equity. And Jonathan Curtis, Portfolio Manager, Franklin Equity Group, focuses on the information technology (IT) sector in “Tech Opportunities Abound Amid Economic Reopening.”