Why investors shouldn't fixate on U.S. innovation

Portfolio managers highlight compelling growth stories in international and emerging markets

Why investors shouldn't fixate on U.S. innovation

Investors might be forgiven for focusing on the U.S. tech sector, given its continuing outsized role in propelling the country’s stock market. But that doesn’t mean they should count out overseas growth stories.

A recent commentary from Capital Group argued that innovation doesn’t exist solely in the States. As an example, it noted that while many customers in some emerging markets had no bank accounts just a few years ago, wide mobile phone ownership led to rapid adoption of mobile payments. In China, that’s created an opportunity for the likes of Alipay and Tenpay – subsidiaries of Ant Financial and Tencent, respectively – and Yeahka; in Brazil, there’s PagSeguro and StoneCo.

The digital push from the COVID-19 crisis has accelerated the adoption of mobile payments around the world, which means investors looking to cash in on the move toward cashless transactions would do well to consider companies abroad.

“A decade from now, I think digital payments will be the norm and people will give you odd looks if you try to pay with cash,” said Capital Group portfolio manager Jody Jonsson.

The international investment case for innovation is even more compelling, the commentary argued, because the best-performing individual stocks have overwhelmingly been outside the U.S. Not only has that been true for long-term periods, it said, but the most recent quarter has also seen Asian stocks – led by China’s Alibaba, Taiwan’s Semiconductor, and China’s Meituan – far outpace the overall market.

Venture capital funding has also been growing much more rapidly abroad than in the U.S., the commentary said, because that’s where VC investors are finding generally cheaper valuations as well as compelling new opportunities. The biopharmaceutical sector in China has seen a surge in VC funding in recent years, with a number of companies pushing to go public today.

Renewables are another captivating area. High decarbonization targets in Europe are pushing utility firms like Enel in Italy, E.ON in Germany and Denmark’s Ørsted to invest heavily in the transition economy, and China’s recently announced target of net-zero carbon dioxide emissions by 2060 will likely inspire similar shifts among Chinese energy firms. Beyond regulation, the renewables space is set to benefit from declining costs enabled by automation, productivity-enhancing artificial intelligence, and improved storage capabilities.

“Some traditional utilities are reaching an inflection point where they are starting to be recognized more as growth companies rather than just staid, old-economy power generators and grid operators,” said portfolio manager Noriko Dhen. “There are strong tailwinds that could drive growth for years.”

Another point for the pro-EM crowd is the inevitable end of the decade-long dollar bull market, which could be on its way. As of November 20, according to Capital Group, the greenback has declined 5% on a year-to-date basis against the euro; against the yen, it’s lost 4%. While timing the start of a currency cycle is a fool’s errand, investor worries about U.S. government debt, near-zero interest rates, and a mixed economic picture set the stage for international and emerging-market equities to shine.

“I believe the dollar is overvalued,” said Capital Group currency analyst Jens Søndergaard, cautioning that evidence of firmed-up growth outside the U.S. would be needed to officially call a bear market in the greenback. “Once global growth does take off, and we have a proper recovery from the pandemic, I think in all likelihood we will see the dollar weaken further.”


Follow WP on FacebookLinkedIn and Twitter