The COVID-19 pandemic inhibited growth across economies worldwide. It wasn’t just here in the U.S.; emerging markets stocks were no exception.
Developing nations whose global GDP is rising precipitously provide global equity investors with a high-risk but high-reward proposition. They also offer geographic diversification, providing a potential source of growth at times when their U.S.-centric portfolios might underperform.
The case for investors to diversify across emerging markets stocks is now buoyed by optimism for an economic rebound, earnings growth potential and a weaker U.S. dollar. In 2021, the International Monetary Fund’s World Economic Outlook projects emerging markets and those developing economies’ GDP’s will rebound 6% after having contracted an estimated 3.3% in 2020.
“Given our preference for cyclicality on the domestic side of things and the potential for continued weakness in the U.S. dollar, we think that the emerging markets represent a good opportunity for investors in 2021,” writes Baird Investment Strategy Analyst Ross Mayfield.
But which emerging markets stocks still have room to roll? We look at five of the best EM plays from several of the largest developing nations.
Data is as of March 3.
- Country: India
- Market value: $77.5 billion
Bangalore, India-based IT company Infosys (INFY, $18.46) is projected to enjoy double-digit profit growth this year and should remain attractive to growth investors, says Zacks Investment Research.
The $13.1 billion multinational, with 46 offices worldwide and some 158,000 employees, offers business consulting and information technology services for clients to help execute various strategies as part of their digital transformation.
In the company’s third quarter ended Dec. 31, Infosys reported $7.13 billion in large deal signings, an all-time high; 73% of them were new clients. New client partnerships with Daimler AG, Rolls-Royce and Vanguard demonstrate its depth of digital and cloud capabilities, the firm says.
For instance, the company’s partnership with Rolls-Royce is for engineering and research-and-development services for the luxury automaker’s Civil Aerospace business.
“Infosys has been a valued partner to Rolls-Royce for many years,” says Kishore Jayaraman, president of Rolls-Royce India & South Asia. “We are committed to India and remain positive about the long-term prospects in this market.”
Zacks expects Infosys’ earnings per share to grow 12.1% in 2021, up from its historical EPS growth rate of 5.4% and ahead of the industry’s 11.8% expected growth rate. Better still, company sales are expected to improve 6%, outstripping the industry average 5.3%.
Also bullish on Infosys’ prospects is BofA Securities, which calls INFY one of its top emerging markets stocks because of its “improved leadership and strategic clarity” and “superior revenue growth.”
- Country: Russia
- Market value: $23.6 billion
Several emerging markets stocks in the tech sector are compared to U.S. tech giants. For instance, Yandex (YNDX, $66.09) is known as “The Google of Russia” given that it operates the country’s go-to search engine.
With almost 60% market share in Russia, Yandex is not only the largest Russian-language search engine, but the largest tech company in Russia. Still, there is more upside for Yandex as it expands its tentacles into numerous subsectors of the internet economy.
Yandex, a blend of multiple tech companies into a single platform, is considered a one-stop-shop or super-app, offering access to many parts of a consumer’s life via their phone, which allows Yandex to cross-sell its products to existing users. That includes not just search, but also email, music, videos, traffic updates and more.
Yandex also owns 62% of Yandex Taxi, a joint venture with Uber Technologies (UBER) that includes ride-hailing, food delivery and self-driving cars.
“Yandex is not only the Google of Russia, but the Uber of Russia with Yandex Taxi,” adds Kevin Carter, founder and chief investment officer of the Emerging Markets Internet & Ecommerce ETF (EMQQ). “In addition to search and ride hailing, the company is also seeking to bolster its position in smartphone-based financial services. Their attempt to acquire mobile banking leader Tinkoff (a leading Russian online bank) failed; however, we expect them to still be aggressive in adding financial services.”
In fact, that taxi vertical accounted for a whopping 26% of the company’s revenues in 2020; online advertising connected to its core internet properties were still the lion’s share, at nearly 70%.
“Despite tougher comps in 2021, we see 61%/77% revenue growth for Mail/Yandex in 2021 and increased order frequency to help profitability at both Yandex and Delivery club,” says BofA Securities, which insists that “faster growth is back for Russian internet companies in 2021.”
Ozon Holdings PLC
- Country: Russia
- Market value: $12.4 billion
We had the Google of Russia – now, here’s the country’s Amazon.
Ozon Holdings (OZON, $60.25) operates as an internet retailer of consumer retail products ranging from food and electronics to automotive parts. Ozon also manages an online marketplace platform enabling third-party sellers to offer their products to consumers via their websites and mobile apps.
And its similarity to Amazon.com (AMZN) goes all the way back to its founding in 1998, when it started as an online bookstore.
Since then, the Cyprus-incorporated company has added so much more. One of Ozon’s more recent introductions has been financial services products, including debit cards. The company boasted 260,000 activated “OZON.Cards” as of Sept. 30, 2020, up from 57,000 as of Dec. 31, 2019. That’s encouraging, given that during the same period, Ozon reported cardholders made purchases 60% more frequently than non-cardholders.
This fresh-faced emerging markets stock went public in November 2020, when it raised $1.2 billion to become America’s largest emerging-markets IPO for the year. Those funds will go toward expanding to capture Russia’s growing e-commerce market.
“(The IPO) now has Ozon well positioned to deliver,” EMQQ’s Kevin Carter says.
Russia’s e-commerce market is expected to grow at a compound annual rate of more than 30% through 2025, as e-commerce still accounts for a small (roughly 11%) percentage of overall retail sales; in the U.S., e-commerce accounts for 19%.
In the first nine months of 2020, Ozon’s gross merchandise value soared 142% year-over-year and its saw sales rise 70% to $900 million on the transition to online shopping that resulted from the COVID-19 pandemic. During that same period, Ozon’s operating margins improved to -17.7% from -31.7%.
More recently, “Ozon outpaced both Wildberries and AliExpress Russia by the share of online retailing mobile app downloads in January 2021 (we think Wildberries and AliExpress Russia are the largest players on the market at the moment in GMV terms),” says UBS, which rates OZON stock at Buy. “We think the data serve as evidence of Ozon’s both brand awareness and market position strengthening in Russia.”
- Country: Taiwan
- Market value: $632.0 billion
Semiconductors, integral in the development of producing smaller, faster and more affordable products are seen by investors as a key investment for those looking for exposure in the sector.
As the world’s largest contract chipmaker, Taiwan Semiconductor (TSM, $122.89) is poised to capitalize on the global shortages that have resulted from the proliferating demand for high-performance chips needed for the production of automobiles, consumer electronics and aerospace. Apple (AAPL), Qualcomm (QCOM) and Advanced Micro Devices (AMD) are among its largest clients.
The COVID-19 pandemic turbo-charged demand for PCs and electronic devices as online learning and working remote skyrocketed. In December, the Semiconductor Industry Association reported that global chip sales would grow 8.4% in 2021 from $433 billion in 2020. Also contributing to the shortage are shifting semiconductor models among the outsourced chip makers and the trade war with China.
TSM plans to spend $28 billion to increase semiconductor production capacity in response.
Another reason this emerging markets stock should be on your radar: In February, Nikkei Asia reported that Apple had partnered with TSM to develop micro OLED displays for use in its upcoming augmented reality devices. The OLED displays, designed to be less than an inch in size, are not only smaller and thinner, but more energy-efficient.
This project deepens the existing relationship between Apple and TSM, the exclusive supplier of processors for Apple’s iPhone. Apple, wanting to reduce its dependence on its other major suppliers of chips, turned to Taiwan Semiconductor to build its in-house-designed central processors for Mac computers.
- Country: China
- Market value: $144.3 billion
JD.com (JD, $93.62) is a Beijing, China-headquartered holding company that operates both an online retail website and provides marketing services for merchants. JD Retail, sells general merchandise, electronics and home appliances, and its New Businesses segment sells digital advertising to merchants.
Like here in the U.S., the pandemic created new shopping trends in China, with scores of Chinese becoming first-time e-commerce buyers embracing online retail apps.
“(The Chinese) want stuff and more of it,” says EMQQ’s Kevin Carter – that goes from small electronic purchases to big-ticket appliances and even cars.
In its most recent quarter, JD extended its reach in China’s lower-tier cities that accounted for 80% of its new shoppers. Purchases of groceries, health and beauty aids, consumer electronics and home appliances were robust.
China and its economy took a hammering in 2020 in the wake of COVID-19, but the World Bank expects China’s economy to snap back by 7.9% in 2021. That’s good for news for emerging markets stocks in general, many of which hinge on Chinese economic growth. But that’s especially beneficial to China e-tailers, as e-commerce is only expected to keep flourishing.
JD is not without competition. Chinese-based competitors include Alibaba (BABA) and Pinduoduo (PDD), among others. And JD’s active customers through the third quarter of 2020 were 441.6 million, versus Alibaba’s 757 million and Pinduoduo’s 737.7 million.
Still, it’s a large market with room for multiple players. The trend toward e-commerce and multichannel growth should provide JD a strong tailwind for years to come.