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Each year, many investors look to economic forecasts to help guide their asset allocation decision making. While the macro backdrop will certainly influence various asset classes (some more than others), there are several key trends across the globe that excite the portfolio managers of the BetaShares Legg Mason Global Emerging Markets Fund (managed fund) (ASX: EMMG) regardless of the economic forces at play. In this guest article, the Martin Currie Emerging Markets team takes an in-depth look at some of these themes.
Semiconductors: A long-term structural growth story
Take, for instance, the global semiconductor manufacturing industry, where recently auto manufacturers and mobile handset makers have registered a massive shortage in chips. In 2021, the global semiconductor market will near an estimated US$500 billion in annual sales, an industry serviced by only a relatively small base of global suppliers1. There are a few reasons why there are only a handful of key players in the global semiconductor manufacturing industry. Firstly, the semiconductor industry is a rarefied space as it is highly competitive, but secondly there are hard science inputs and incredibly high capital expenditure thresholds that are required for businesses to maintain their competitive advantages.
Emerging markets dominate
The list of leading global semiconductor businesses is now dominated by emerging market companies. TSMC, Samsung Electronics, SK Hynix and Globalwafers in particular are companies that the Martin Currie team expects to grow rapidly over the next few years. TSMC and Samsung Electronics will spend in the neighbourhood of US$60 billion in capital expenditure this year alone2 – a indication of the growth prospects these companies are projecting. TSMC based in Taiwan achieved a 25% increase in revenue growth in 20203 compared to the previous year, versus a company like Intel which once dominated the global chip industry but has now given way to the intellectual property that can be found across Asia. Now in TSMC’s case, certainly having a favourable macro backdrop would prove useful, but the sheer growth opportunity in its industry coupled with its world- leading intellectual property should provide an exciting opportunity here in 2021.
Electric vehicles driving growth
The meteoric rise of Tesla has certainly dominated headlines in recent years as the marketplace has woken up to the prospect of electric vehicles (EV) finally going mass market. The passenger vehicle market is worth over a trillion dollars4, and the prize to be had is potentially large for active managers. As with the semiconductor industry where emerging markets are seeing the lion’s share of growth, EV battery production is dominated by emerging market companies.
Asia leading the way
The EV market has been an area where the need to reduce carbon emissions and environmental pressures have played a huge role in setting the stage. The Martin Currie Emerging Markets team’s awareness of ESG issues was a key reason for its early position in the EV space well before it became a mainstream theme. Today, about 3% of current auto sales are in EVs, but it is predicted that by 2030, 25% of new cars sold will be battery powered, rising to over 80% by 20505. The demand for EV batteries (the core component of EVs) is expected to grow ten-fold over the next 10 years and it is estimated that globally there will be in excess of 120 million electric vehicles by 20306. Right now the majority of that surging demand is being met by just a handful of Asian producers. Korea’s LG Chem and China’s CATL are two businesses already taking advantage of this trend. The Martin Currie Emerging Markets team is also finding opportunities further down the EV supply chain from companies focused on battery housing, to the equipment used to produce the EV battery. Again, the forces at play with respect to EVs are happening regardless of the economic forecasts by market analysts across the globe.
A highly investable asset class
The semiconductor and EV industries are just two of the secular growth trends that excite the Martin Currie portfolio management team; the team is also finding a range of opportunities across new economy sectors from gaming to online-to-offline services such as food delivery. Emerging markets have now been investable as an asset class for 30 years and have come a long way in that time. Early investors flew around the world looking for the best opportunities in what was then an asset class dominated by local news flow and cyclical industries – one where it was considered having deep local connections was the most effective way to generate alpha. Fast forward to the present day and the world is far more connected. Identifying sustainable growth businesses like LG Chem or TSMC is much easier to navigate than in the past. Pre-pandemic, the Martin Currie team engaged and travelled widely to meet senior management with every investee company. The onset of lockdowns has shifted the team’s engagement and dialogue with companies through mediums like Zoom and Microsoft; staying connected today is far more achievable than in years past so perhaps the ‘boots on the ground’ mentality or analyst’s rigorous debate on macro conditions are not nearly as useful today than previously.
Investors today should therefore not consider whether they need emerging markets in their portfolio, but rather can they afford not to have access to some of the world’s leading businesses with strong growth potential.
Gaining exposure to emerging markets
Australian investors are able to gain exposure to emerging markets via the BetaShares Legg Mason Emerging Markets Fund (managed fund) (ASX: EMMG).
EMMG invests in an actively managed, high-conviction portfolio of emerging market shares. The fund is managed by the Martin Currie Emerging Markets Team, which takes an active approach to selecting countries with attractive economic and demographic trends as well as compelling individual investment exposures.
The information provided should not be considered a recommendation to purchase or sell any particular security or units in a fund. It should not be assumed that any of the securities discussed here were, or will prove to be, profitable.
There are risks associated with an investment in EMMG, including market risk, emerging markets risk, currency risk and market making risk. For more information about risks and other features of EMMG, please see the Product Disclosure Statement, available at www.betashares.com.au.
1. Source: Statista, January 2021.
2. Source: Martin Currie, March 2021.
3. Source: TSMC, January 2021.
4. Source: Statista, January 2021.
5. Source: Statista, February 2021.
6. Source: Statista, June 2018.
BetaShares Capital Ltd (ABN 78 139 566 868 AFSL 341181) (BetaShares) is the issuer and responsible entity of the BetaShares Legg Mason Emerging Markets Fund (managed fund) (ARSN 629 322 247) (Fund). BetaShares has appointed Legg Mason Asset Management Australia Ltd (ABN 76 004 835 849 AFSL 240827) (Legg Mason Australia) as investment manager for the Fund. Legg Mason Australia is part of Franklin Resources, Inc. Martin Currie Investment Management Limited, an affiliate of Legg Mason Australia, provides the investment management services for the Fund. Before making an investment decision you should read the Product Disclosure Statement (PDS) for the Fund carefully and consider, with or without the assistance of a financial advisor, whether such an investment is appropriate in light of your particular investment needs, objectives and financial circumstances. The PDS is available and can be obtained by contacting BetaShares on 1300 487 577 or Legg Mason Australia on 1800 679 541 or at www.betashares.com.au or www.leggmason.com.au. This information does not take into account the investment objectives, financial objectives or particular needs of any particular person. Neither BetaShares, Legg Mason Australia, nor any of their related parties guarantees any performance or the return of capital invested. Past performance is not necessarily indicative of future performance. Investments are subject to risks, including, but not limited to, possible delays in payments and loss of income or capital invested.
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