For financial professionals in Uruguay

Long-term trends in EM: taking the lead in innovation

Daniel J. Graña, CFA

Daniel J. Graña, CFA

Portfolio Manager, Emerging Market Equity


Matthew Culley

Matthew Culley

Portfolio Manager | Research Analyst


Mar 17, 2022

Portfolio Managers, Daniel Graña and Matt Culley, discuss how traditional outsourcing and convergence opportunities in emerging markets are being complemented by innovation opportunities as EM companies adopt a leading role in digitalization, decarbonization and other major global innovation themes.

Key Takeaways

  • Traditionally, investors have been drawn to emerging markets for outsourcing and convergence opportunities.
  • Today, EM companies are playing a leading role in a third major investment theme: innovation.
  • In our view, this innovation is occurring more rapidly and evolving along different lines than it has in the past, reshaping how emerging markets fit into the global innovation landscape.
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Daniel Graña: Emerging markets is more than just a call option on global growth or a cog in the global supply chain. Historically, there were two reasons to invest in emerging markets. One, of course, is the outsourcing story and the other was the convergence story. There are great business models in both. The convergence story, of course, is [that], as income levels rose, people would want to have modern conveniences. And the supply chain side is the companies that do very well at making widgets or making services that are cheaper, better, faster than their counterparts in the developed markets. But increasingly there is a third reason to invest in emerging markets: innovation. And this is the part that gets me particularly excited, because more often than not these days, emerging markets are not playing sort of a supporting role, but increasingly playing a leading role in innovation. They are fantastic companies that are looking to tackle emerging market-specific problems using technology.

And innovation broadly written, whether it is decarbonization, the entire decarbonization chain of solar, wind and all the sort of bits and pieces that go into it, as well as new innovative companies such as biopharma companies, the sort of early-stage, pre-revenue [companies], even, that show promising results in drug tests, clinical tests. And so, we want to focus on innovative companies.

Matt Culley: We think innovation in EM is very different than it has been in the past. So, we all know that innovation is reshaping the world, but it is happening in different places and at a pace much more rapid than what we have seen in the past. Historically, commercialization of new technologies was principally driven by developed markets, with EM playing much more of a supporting role. However, years and decades of outsourcing and convergence-led growth have redistributed those critical inputs for innovation across our markets. At the same time, what we have seen is the intersection of consumer electronics and Internet penetration coinciding with a materially younger median age, [which] means that today we have the vast majority of the digitally native global population sitting in EM. And that is very different than it was 10 years [ago] and very different than it was even five years ago.

So, we look at education, China and India alone graduate five times more science, technology, engineering and math students than the United States. Russia, Korea, Indonesia are not all that far behind. Historically, the business formation structures were structurally biased against small businesses and startups, favoring incumbents and SOEs [state-owned enterprises]. Today, as we see this next wave of innovation and business is becoming more digitally minded first, we are starting to see that change. So, many of those entrepreneurs, instead of leaving and going to the West, are actually staying home. And they are staying home for two reasons: one, they see the opportunity to drive substantial social change. But they also are seeing this enormous market opportunity that has the ability to grow for decades and decades and decades. And again, we think that this reshapes how EMs fit into the global innovation landscape, in that we expect them to be much more of a leader going forward rather than playing that supporting role.

 

“SOE” refers to state owned enterprises. 

“EM” refers to Emerging market investments, which have historically been subject to significant gains and/or losses. As such, returns may be subject to volatility.

Health care industries are subject to government regulation and reimbursement rates, as well as government approval of products and services, which could have a significant effect on price and availability, and can be significantly affected by rapid obsolescence and patent expirations.

These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any securities, funds, sectors and indices mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.

 

Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

 

The information in this article does not qualify as an investment recommendation.

 

Marketing Communication.

 

Glossary

 

 

 

Important information

Please read the following important information regarding funds related to this article.

The Janus Henderson Fund (the “Fund”) is a Luxembourg SICAV incorporated on 26 September 2000, managed by Janus Henderson Investors Europe S.A. Janus Henderson Investors Europe S.A. may decide to terminate the marketing arrangements of this Collective Investment Scheme in accordance with the appropriate regulation. This is a marketing communication. Please refer to the prospectus of the UCITS and to the KIID before making any final investment decisions.
    Specific risks
  • Shares/Units can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • Shares of small and mid-size companies can be more volatile than shares of larger companies, and at times it may be difficult to value or to sell shares at desired times and prices, increasing the risk of losses.
  • Emerging markets expose the Fund to higher volatility and greater risk of loss than developed markets; they are susceptible to adverse political and economic events, and may be less well regulated with less robust custody and settlement procedures.
  • This Fund may have a particularly concentrated portfolio relative to its investment universe or other funds in its sector. An adverse event impacting even a small number of holdings could create significant volatility or losses for the Fund.
  • The Fund may use derivatives with the aim of reducing risk or managing the portfolio more efficiently. However this introduces other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
  • If the Fund holds assets in currencies other than the base currency of the Fund or you invest in a share/unit class of a different currency to the Fund (unless 'hedged'), the value of your investment may be impacted by changes in exchange rates.
  • Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
  • The Fund may incur a higher level of transaction costs as a result of investing in less actively traded or less developed markets compared to a fund that invests in more active/developed markets. These transaction costs are in addition to the Fund's Ongoing Charges.
  • The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.
The Janus Henderson Horizon Fund (the “Fund”) is a Luxembourg SICAV incorporated on 30 May 1985, managed by Janus Henderson Investors Europe S.A. Janus Henderson Investors Europe S.A. may decide to terminate the marketing arrangements of this Collective Investment Scheme in accordance with the appropriate regulation. This is a marketing communication. Please refer to the prospectus of the UCITS and to the KIID before making any final investment decisions.
    Specific risks
  • Shares/Units can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • Emerging markets expose the Fund to higher volatility and greater risk of loss than developed markets; they are susceptible to adverse political and economic events, and may be less well regulated with less robust custody and settlement procedures.
  • The Fund may invest in China A shares via a Stock Connect programme. This may introduce additional risks including operational, regulatory, liquidy and settlement risks.
  • If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
  • This Fund may have a particularly concentrated portfolio relative to its investment universe or other funds in its sector. An adverse event impacting even a small number of holdings could create significant volatility or losses for the Fund.
  • The Fund may use derivatives with the aim of reducing risk or managing the portfolio more efficiently. However this introduces other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
  • If the Fund holds assets in currencies other than the base currency of the Fund or you invest in a share/unit class of a different currency to the Fund (unless 'hedged'), the value of your investment may be impacted by changes in exchange rates.
  • When the Fund, or a hedged share/unit class, seeks to mitigate exchange rate movements of a currency relative to the base currency, the hedging strategy itself may create a positive or negative impact to the value of the Fund due to differences in short-term interest rates between the currencies.
  • Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
  • The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.
Daniel J. Graña, CFA

Daniel J. Graña, CFA

Portfolio Manager, Emerging Market Equity


Matthew Culley

Matthew Culley

Portfolio Manager | Research Analyst


Mar 17, 2022