Growth in the Asian stock market no longer comes from big tech companies. The best growth opportunities now lie in young, smaller technology companies and in the rapidly emerging healthcare sector, says Albert Kwok, manager of the PGIM Jennison Emerging Markets Equity Fund.
‘I’m not really a fan of the big tech companies anymore, because they don’t come up with disruptive technologies,› says Kwok. The Chinese state is also increasingly interfering in large technology companies. The first victim was Alibaba, which saw the IPO of its fintech branch Ant Financial thwarted last year. The Chinese authorities have also begun to investigate whether the company is abusing its market position. Therefore the Jennison Emerging Market team decided to sell its position in Alibaba at the end of last year.
Now Tencent, in which the fund still had a position of 3.5% at the end of February, seems to be the authorities› next target. The firm’s share price has already fallen by about 15% in the past month.
It is not exactly clear what the Chinese government is after here, says Kwok. ‘Although we expect more regulatory oversight, it is not clear at this stage what form this will take.’ Of course, the discontent with big tech is not a purely Chinese phenomenon. Criticism of big tech companies is growing, not only from governments but also from users around the world. ‘Many people now spend six hours a day on their smartphones. Everywhere you look, tech companies are facing new regulations. So we expect this trend to continue.’
Next-gen tech
But regulation for big tech is positive for smaller challengers, according to Kwok. ‘Tech giants are not conducive to innovation, for example because they can easily out-compete smaller rivals,› Kwok says. But new regulations can actually provide room for next-gen tech companies.
The PGIM Jennison Emerging Markets Equity Fund already invests heavily in such companies, and the portfolio’s emphasis in recent years has increasingly shifted to faster-growing small caps. The median market cap of the companies in the fund is only €24 billion now.
Kwok cites Bilibili, ‹the YouTube of China›, Meituan Dianping (a kind of Alibaba for services) and ecommerce company SEA from Singapore (the largest position in the fund with a 7.5% allocation) as examples of companies that could benefit from big tech’s loosening grip. ‘SEA is particularly big in Southeast Asia and is growing very fast in both ecommerce and online gaming. The company is also less bothered by regulators for now. They recently got a digital banking licence in Singapore, which is great news for their fintech business.’
Bilibili now has 200 million users, and that number is expected to double every two years, says Kwok. ‹Right now it only has a market capitalisation of $40 billion.› Alibaba and Tencent each have their stake in the rise of the smaller tech companies, by the way. Both companies have a minority stake in Bilibili. ‘They do not interfere with the operational process, but see it mainly as a strategic investment,’ according to Kwok.
Yet Kwok also invests in market leaders in ecommerce, such as Latin American MercadoLibre, with an allocation of 5.9% the second largest position in his fund. After all, MercadoLibre still has a lot of growth potential. ‹The market share of ecommerce there is still very low, about the same as in China 10 years ago.›
Healthcare
But Kwok sees perhaps the best growth opportunities in emerging markets in the healthcare sector, especially in China. This is partly due to the government encouraging investment in drug development to reduce dependence on Western medicine. ‹The Chinese drug industry was still dominated 10 years ago by pharma companies making cheap, generic drugs. But especially in the past two years, huge developments are taking place in biotech. In 2019, more than 200 new drugs were patented in China. By comparison, in 2014 there were only 90.›
China is also a huge market, Kwok notes. ‹In China, 4.3 million cancer diagnoses take place every year, and due to a combination of an ageing population and economic growth, that number is rapidly increasing. The Chinese government therefore considers it a top national priority to become self-sufficient in the medical field, in fact in the same way as they want to build up a national industry for semiconductors.’
Moreover, healthcare spending is still very low in China, at only 5% of GDP. ‘This percentage will grow fast, as China invests heavily in healthcare and biotech. We already noticed this trend before the pandemic actually, and expect it to be accelerating now. This is the case for China, but more or less for all emerging markets.’ At the end of February Kwok’s fund had an allocation of 22.3% to the healthcare sector, more than five times the share of its benchmark, the MSCI Emerging Markets Index.