Emerging markets have become overexposed to China. Soaring values for Chinese tech companies, and some opening of the onshore “A-shares” markets to outside investors, have lifted the country’s share of global emerging market indexes to almost 40%. Add Taiwan and South Korea, which are emerging only in name, and you get 75%. Throw in India and Brazil, and everyplace else is close to a rounding error. (This is equities we are talking about, bond weightings are very different.)
So Nikkei Asia publishing a ranking of growth companies that excludes China, for “logistical difficulties and problems comparing accounting,” is a bit like a cocktail party that ignores the proverbial elephant next to the bar. But it does point to investment opportunity in the parts of emerging Asia that are actually emerging. And that’s encouraging when China has gone into a bit of a funk. A few conclusions:
—Southeast Asia (and maybe India) looks set to seize the baton from China in both macroeconomic growth and the growth of e-commerce.
—There is still plenty of “open space” there for digital start-ups to dominate their categories.
—Most of the companies positioned to do this are not publicly listed yet. But they will be.
Where and what is Southeast Asia? For simplicity’s sake, we’ll take the four biggest countries: Indonesia, Philippines, Vietnam, and Thailand. Their combined population is about 550 million. Average GDP growth in 2019 was just over 5%. Tens of millions of families are at a tipping point where a little more growth lifts them into the consuming middle class. The Philippines, despite its reputation for misery and mass migration, is leading the charge. Its middle class should nearly double to 63% of the population by 2030, according to consultant BCG. Indonesia’s will climb from 31% to 45%.
Internet economies are growing much faster still. Online purchases in Indonesia will triple over the next five years to $120 billion, Bain & Co. predicts. Thailand’s will jump from $25 billion to $60 billion.
Investors have few avenues to profit on this bonanza, so far. That will change, to judge by the Nikkei growth list. This is where tiny Singapore comes in. The city state, with its prodigious density of capital and brainpower, is the natural command center for a vast region that technology makes much easier to treat as one market. Where Singapore will fit another burst of knowledge workers is another question.
Five of Nikkei’s top 20 companies are Singapore-based, impressive considering the field includes Japan, Korea, Taiwan, India, and Australia. Indonesia and Malaysia contribute one each to the top 20. The highest, Amazon-level e-commerce ground in Southeast Asia may already be occupied by Sea Ltd (ticker:SE), a Singapore company whose stock has quintupled over the past year. But any number of verticals remain up for grabs, and heady expansion.
The Asian growth champion is Carro, an online used car marketplace run from Singapore. No. 3 is SCI Commerce, which helps merchants run their online presence. No. 14 is Ninja Van Logistics, which rather speaks for itself. No. 19 is RedDoorz, a Hotels.com lookalike that takes bookings in 40 different currencies.
These companies are new, all founded since 2015. They are small, 2019 revenue of $250 million or less. But they’re getting bigger fast, every one more than doubling turnover every year. Their IPOs are a little ways off, but they are coming.
That’s heartening news for emerging markets investors as the euphoria of 2020 wears off. China’s markets boom is hardly over. YouTube-esque video service Bilibili (BILI) raised $2.6 billion from a secondary Hong Kong listing this week. But investors in China remain hostage to many factors beyond their companies’ control: geopolitical jousting with the U.S., shifting moods from Beijing’s own regulators, volatile emotions of Chinese retail investors. More geographical diversity will be a plus, and Southeast Asia can provide it, in time.