Hot Emerging Market Stocks Don't Come Cheap - Barron's

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You think Tesla (ticker: TSLA) stock had a good year? Shares in Elon Musk’s electric-car dynamo jumped a mere 670% during 2020. Chinese competitor Nio (NIO) posted an 11-fold increase. 

EVs aren’t the only sector where emerging market stars left U.S. names in the dust. Amazon.com’s (AMZN) 75% advance lagged Latin American e-commerce sensation MercadoLibre’s (MELI) 200%. Southeast Asian online marketplace Sea (SE) climbed fourfold. Chinese social-media power Tencent (700: Hong Kong) outperformed Facebook (FB) 50% to 30%. 

This growth-stock alpha explosion is pushing optimism about emerging markets broadly. “You’ve gone from arbitraging low-cost labor to a China that is producing more Ph.D.s and patents than the U.S.,” says Brian Freiwald, manager of the Putnam Emerging Markets Equity fund. “The 2020s will be the decade of EM.”  

But the vertical valuation climbs are making other managers nervous. “Investors have dived into the disruptive, next-thing story without any real nuance,” says Justin Leverenz, chief investment officer for developing-market equities at Invesco. “That’s created a clutch of companies around the world whose stocks are divorced from reality.” 

There are reasons emerging market disrupters caught fire this year. Compared to the maturing U.S. FAANG companies, they are still…emerging. Tencent flashes two or three ads a day at its billion or so Tencent users, compared with 25 for Facebook. Tencent can gradually increase the number of ads directed at its huge base, creating top-line growth potential for the Chinese giant.  

The rest of Asia and Latin America are practically virgin terrain for digital services. E-commerce accounts for 3% of retail sales in Brazil compared with 21% in China, notes Malcolm Dorson, Latin America portfolio manager at Mirae Asset Global Investments.   

But with the longer runway in emerging markets comes hotter competition. Alibaba Group Holdings ’ (BABA) dominance of Chinese online shopping seemed impregnable, until it wasn’t. Smaller rivals JD.com (JD) and Pinduoduo (PDD) took large bites of the incumbent’s lunch during this pandemic year. Shares in both upstarts more than doubled, while Alibaba’s crept up 20%.  Nio was just No. 7 in 2020 Chinese electric-vehicle sales, indicating a big shakeout to come. MercadoLibre is fending off multiple attacks in its core Brazilian market—from old-school retailers heading online, such as Lojas Americanas (LAME4.Brazil), and start-up fintechs like PagSeguro Digital (PAGS) and StoneCo (STNE).

Hot emerging market stocks may well take a breather heading into 2021,  concludes Dara White, global head of emerging markets equity at Columbia Threadneedle Investments. “The core growth segment may go sideways for a while,” he says. “But it’s still inning three or four of a nine-inning ballgame.” 

Invesco’s Leverenz is moving more decisively away from what he calls the FOMO (fear of missing out) bubble. Instead he is buying offline Chinese consumer companies such as hotel operator Huazhu Group (HTHT) and fast-food purveyor Yum China Holdings (YUMC), and select Indian financials: Kotak Mahindra Bank (KMB: India) and HDFC Bank (HDB).

The coming years promise new great names in nascent, crowded emerging market sectors. Shares in Chinese solar-equipment makers such as Dago New Energy (DQ), GCL-Poly Energy Holdings (3800:Hong Kong), and Xinyi Solar Holdings (968: Hong Kong) mushroomed this year, but the winners can keep growing for decades to come. Ditto for emerging health-care stars like Korean pharma producer Celltrion (068270) and China’s Shenzhen Mindray Bio-Medical Electronics (300760: China)—provided an even better company doesn’t come along to fill their niche.

There are plenty of thrills left in emerging markets, but they won’t come cheap.  

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Hot Emerging Market Stocks Don't Come Cheap - Barron's
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