Emerging market tech stocks now constitute 28% of the MSCI EM index, higher than the S&P 500 index

Innovation and technological advancement in emerging markets is steadily intriguing more investors. The US stock market benchmark index, the S&P 500 index (SPY) (IWM), has the largest share of its portfolio, with 23.2% (as of Sep 29) invested in information technology stocks (QQQ), followed by financials (XLF) which command 14.6% of the portfolio. The surge in the FANG stocks (FDN) over the past few years is one the primary reasons for the exceptional weighting. However, what usually remains unnoticed here is that the emerging market benchmark, the MSCI emerging markets index (VWO), has allocated an even higher weight to emerging market tech stocks than the S&P 500 index. Information technology stocks now command a 27.6% (as of September 29) of the MSCI emerging markets index portfolio. Furthermore, the iShares MSCI Emerging Markets ETF (EEM), which tracks the index, has 28% of its assets invested in technology stocks.

Will the tortoise win the race?

The behavior of global technology stocks over the past few years reminds us of the popular ‘hare and the tortoise’ fable by Aesop. While US-based tech stocks (XLK), much like the hare, were quick to pick up speed and race ahead, who is to say they may be approaching their resting point. Meanwhile, emerging market-based tech stocks (the tortoise in our analogy) have been slowly but steadily treading their path, unnoticed by many. Valuation data reveals that these emerging stocks are 35% cheaper than their developed market counterparts.

So, while it seems that emerging market tech stocks have established themselves as a point of interest for market participants, which ones merit our attention? The emerging markets index portfolio is currently invested in 844 securities, of which about 233 stocks (27.6%) belong to the information technology sector. So, here is a bird’s eye view of the top 23 (top 10% of the tech stocks) that are now commanding the highest allocation in the emerging market index. 

No.TickerTop 23 tech stocks in the MSCI emerging markets portfolioWeight

(as of Sep 29)

1TCEHY, 0700.HKTencent Holdings Li (CN)4.24%
2SSNLF, 005930.KSSamsung Electronics Co4.18%
3TSM, 2330.TWTaiwan Semiconductor Mfg3.63%
4BABAAlibaba Group Holding ADR3.01%
5NPSNYNaspers N1.95%
6HNHPF, 2317.TWHon Hai Precision Industry Co1.16%
7BIDUBaidu ADR1.10%
8000660.KSSK Hynix0.63%
9INFYInfosys0.59%
10JDJD.Com ADR0.57%
11NTESNetEase.com ADR0.49%
12035420.KSNAVER0.45%
13CTRPCtrip Com International ADR0.45%
14TCS.NSTata Consultancy0.40%
153008.TWLargan Precision Co0.34%
162454.TWMediaTek Inc0.24%
17AACAF, AACAY, 2018.HKAAC Technologies (CN)0.17%
18HCLTECH.NSHCL Technologies0.16%
192474.TWCatcher Technology Co0.15%
202357.TWASUSTeK Computer0.15%
21LPLLG Display Co0.14%
222382.TWQuanta Computer0.13%
234938.TWPegatron0.13%

 

The surge amongst leading emerging market tech stocks over the past year is well documented. For example, the top five stocks in our list above had already delivered 68%, 72%, 40%, 77%, and 46% over the past 1 year in price return (as of October 30, 2017). Market participants have come to realize the potential of these companies and that seems to be priced into the blue-chips. Most of the top 10 stocks of those listed above have been surging and are trading at prices near about their 5-year highs.

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However, for investors looking for cheaper bets, looking at the next 10 emerging market tech stocks may bring more value. Here are the key financial metrics {liquidity (current ratio), financial leverage (debt to equity ratio), profitability (gross profit margin)} and current (P/E) and expected (Fwd. P/E) valuation figures for the next 10 emerging markets information technology sector stocks (in accordance with the GICS classification) that could soon dominate the MSCI EM index.

The Next Ten

CompanyPriceP/EFwd. P/ECurrent RatioTotal Debt/EquityMargin%
NetEase.com (NTES)$276.5118.4317.632.569.9256.74
NAVER (035420.KS)$793.2633.8234.532.339.14NA
CTrip.com (CTRP)$47.01157.7656.021.525575.40
Tata Consultancy (TCS.NS)$40.4619.8619.455.550.3343.30
Largan Precision Co (3008.TW)$190.3329.8127.383.690.0567.05
MediaTek Inc (2454.TW)$11.5224.8130.911.8522.2735.64
AAC Technologies (AACAF) (AACAY) (2018.HK)$17.75NA26.551.4138.3141.55
HCL Technologies (HCLTECH.NS)$13.1214.0913.612.331.3434.21
Catcher Technology Co (2474.TW)$10.6112.2210.842.2331.4943.48
ASUSTeK Computer (2357.TW)$8.6511.7013.401.632.3114.19

 

Price and return data as of October 30. Ratios as of FY 2016.

Exchange rates used for conversion (as of October 31): 1 US dollar = 1120.69 Korean won = 64.80 Indian rupees = 30.16 new Taiwan dollars = 6.63 Chinese yuan

  1. NetEase.com (NTES)

NetEase, Inc. is a Chinese Internet Technology Company providing online services centered on content, community, communications, and commerce. NetEase Games is a leading provider of self‐developed PC‐client and mobile games to worldwide users.

The company’s ADR is listed on the NASDAQ GS stock exchange under the symbol NTES. The stock commanded a market capitalization of $36.3 billion in the US stock market on October 30th. Year-end forward P/E for the depository receipt is estimated at 17.63. Estimated earnings-per-share stand at $15.68.

  1. NAVER (035420.KS)

Naver is a popular Web portal in South Korea. It was the first web portal to use its own proprietary search engine. Along with its search engine, the company provides other web portal services such as online games, and content development. The company also offers online marketing service through banner advertisement and e-commerce services.

The company’s stock is listed on the Korea stock exchange under the ticker 035420. The stock commanded a market capitalization of $26.24 billion in the Korean stock market on October 30th. Year-end forward P/E for the stock is estimated at 34.64. Estimated earnings-per-share stand at about $23.

  1. CTrip.com (CTRP)

Ctrip.com International, Ltd. is a leading provider of online travel agency services in China, including mobile applications, accommodation reservation, transportation ticketing, packaged tours and corporate travel management.

The company’s ADR is listed on the NASDAQ GS stock exchange under the symbol CTRP. The stock commanded a market capitalization of $24.1 billion in the US stock market on October 30th. Year-end Forward P/E for the depository receipt is estimated at 56.02. Estimated earnings-per-share stand at $5.56.

  1. Tata Consultancy Services (TCS.NS)

India-based Tata Consultancy Services Limited, a division of Tata Sons Limited, is a global IT services organization that provides a comprehensive range of IT services to its clients in diverse industries. The company caters to finance and banking, insurance, telecommunication, transportation, retail, manufacturing, pharmaceutical, and utility industries.

The company’s stock is listed on the National Stock Exchange of India under the symbol TCS. The stock commanded a market capitalization of about $80 billion in the Indian stock market on October 30th. Year-end Forward P/E for the stock is estimated at 19.45. Estimated earnings-per-share stand at $2.08.

  1. Largan Precision Co (3008.TW)

Taiwan-based Largan Precision Company Limited a major supplier of camera lens modules for smartphones, tablet computers, and digital cameras, among other devices.

The company’s stock is listed on the Taiwan stock exchange under the ticker 3008. The stock commanded a market capitalization of $25.6 billion in the Taiwanese stock market on October 30th. Year-end Forward P/E for the stock is estimated at 27.43. Estimated earnings-per-share stand at $6.95.

  1. MediaTek Inc (2454.TW)

MediaTek Inc. is a Taiwanese fabless semiconductor company that digital multimedia solutions.  for wireless communications, HDTV, DVD, and Blu-ray. The company is a market leader in developing tightly-integrated, power-efficient systems-on-chip (SoC) for mobile devices, home entertainment, network and connectivity, automated driving, and IoT.

The company’s stock is listed on the Taiwan stock exchange under the ticker 2454. The stock commanded a market capitalization of $18.22 billion in the Taiwanese stock market on October 30th. Year-end Forward P/E for the stock is estimated at 30.91. Estimated earnings-per-share stand at $0.37.

  1. AAC Technologies (AACAF) (AACAY) (2018.HK)

AAC Technologies Holdings Inc. designs, develops and manufactures a broad range of miniaturized components for mobile devices such as smartphones, tablets, wearables, ultrabooks, notebooks and electronic book-readers.

The company’s stock is listed on the US stock exchange under the symbol AACAF. The stock commanded a market capitalization of $21.7 billion in the US stock market on October 30th. Year-end Forward P/E for the stock is estimated at 26.55. Estimated earnings-per-share stand at $0.67.

  1. HCL Technologies (HCLTECH.NS)

HCL Technologies Limited is an Indian multinational IT services company. The company provides software development and related engineering services.  The Group’s technologies utilize a variety of technologies, including Internet and e-commerce, networking, internet telephony, and satellite and wireless communications, among others.

The company’s stock is listed on the National Stock Exchange of India under the symbol HCLT. The stock commanded a market capitalization of $18.71 billion in the Indian stock market on October 30th. Year-end Forward P/E for the stock is estimated at 13.60. Estimated earnings-per-share stand at $0.96.

  1. Catcher Technology Co (2474.TW)

Taiwan-based Catcher Technology Co., Ltd. is principally engaged in the manufacture, processing, and distribution of casings and components for computer and consumer electronic products.

The company’s stock is listed on the Taiwan stock exchange under the ticker 2474. The stock commanded a market capitalization of $8.17 billion in the Taiwanese stock market on October 30th. Year-end Forward P/E for the depository receipt is estimated at 10.84. Estimated earnings-per-share stand at $0.98.

  1. ASUSTeK Computer (2357.TW)

Asustek Computer Inc. is a Taiwanese multinational computer and phone hardware and electronics company. The company manufactures and markets computer motherboards, interface cards, notebook computers, and other related products.

The company’s stock is listed on the Taiwan stock exchange under the ticker 2357. The stock commanded a market capitalization of $6.43 billion in the Taiwanese stock market on October 30th. Year-end Forward P/E for the depository receipt is estimated at 13.40. Estimated earnings-per-share stand at $0.65.

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