The Innovation Inflection Point | Looking for Alpha

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By Manraj Sekhon, CFA, Chief Investment Officer, Franklin Templeton Emerging Markets Equity; Elizabeth Wu, Research Analyst, Health Care Sector, Franklin Templeton Emerging Markets Equities; Leslie Chow, Research Analyst, Franklin Templeton Emerging Markets Equities; Marcos Mundim, Senior Executive Director, Franklin Templeton Emerging Markets Equities and Yi Ping Liao, Senior Research Analyst, Deputy Portfolio Manager, Franklin Templeton Emerging Markets Equities

Franklin Templeton’s Emerging Markets Equities team explores new innovations and long-term investment opportunities in emerging markets.

Emerging markets have seen many changes over the past two decades, and the opportunities available to investors have also evolved and expanded. Our Emerging Markets Equity team met recently to discuss the innovations we are seeing and why we think the long-term outlook looks fertile from an economic growth and market perspective. Watch the video below for our ideas.

Here are some highlights of the trends and opportunities we see.

  • We believe the inflection point is now. The last 18 months have accelerated the use of technology on both the consumer and business side – whether in e-commerce, digital banking or clean energy.
  • Companies that don’t have sunk capital in legacy business models are often able to use technological innovation to leapfrog traditional business models and deliver what consumers want.
  • Today, one of the biggest themes we see in Asia is mobility and the electrification of the transport sector, including battery production.
  • The Asia-Pacific region is also home to the world’s second largest pharmaceutical market, China. The penetration rate for biologic drugs in China is less than 20%, less than half of what we see in developed markets like the United States.1
  • In Latin America, online retail is a big opportunity that we see, especially in Brazil. Online retail penetration in Brazil is around 10%, half that of the US and around a third that of China and the UK.2

Emerging markets typically have young, digitally savvy populations, and in many cases their needs go unmet. There are therefore many opportunities for new players to arrive and innovate.

In India, for example, there are about 800 million people under the age of 35. As investors, this creates opportunities not only in technology companies, but also in areas such as financial services and aspirational products like education and luxury goods. We are excited about what the future holds.

We believe the pandemic period has catalyzed change, innovation and increased focus on technology. It is a very interesting time to observe today’s emerging world.

We believe that the breadth of opportunity, growth, innovation, sustainability of business models and much stronger institutional resilience compared to decades past create an attractive future for emerging markets.

What are the risks ?

All investments involve risk, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Investments in foreign securities involve special risks, including currency fluctuations, economic instability and political developments. Investing in emerging markets, of which frontier markets are a subset, involves increased risks associated with the same factors, in addition to those associated with the small size of these markets, their lesser liquidity and the absence of executives. legal, political, commercial and social established to support securities markets. Since these frameworks are generally even less developed in frontier markets, as well as various factors including the increased potential for extreme price volatility, illiquidity, trade barriers and exchange controls, the risks associated with emerging markets are amplified in frontier markets. To the extent that a strategy focuses on particular countries, regions, industries, sectors or types of investments from time to time, it may be subject to greater risks of adverse developments in those areas of interest than a strategy that invests in a wider variety of countries, regions, industries, sectors or investments.

1. Sources: Frost & Sullivan, IQVIA.

2. Sources: US Census Bureau, ONS UK, IBGE, Euromonitor, HSBC. Data from 2020.

Original post

Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.

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