Looking Beyond China’s High-Flying Tech Stocks? Try Brazil and India.

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Emerging market tech stocks, concentrated in China, have held up better than their U.S. counterparts in the recent market correction.  The

Emerging Markets Internet & Ecommerce

exchange-traded fund (ticker: EMQQ) has fallen 9% since Sept. 1, compared to 13% for the

iShares U.S. Technology

ETF (IYW). Year to date, the emerging market ETF is up 44%, against 23% for the U.S. tech basket.  

That’s giving emerging market investors something to brag about after years of underperformance. Bu it also has them looking beyond the highflying Chinese internet for future returns. “We’ve been trying to maintain some more balance, not go all in on the Chinese tech names,” says Brian Bandsma, emerging market equities portfolio manager at

Vontobel

Quality Growth. 

Twin Chinese giants

Alibaba Group Holding

(BABA) and

Tencent Holdings

(700.Hong Kong) still look to be on solid ground, despite year-to-date gains of 26% and 34%, respectively. They remain cheap relative to U.S. peers. E-commerce king Alibaba trades at about 24 times trailing earnings, compared with more than 80 for 

Amazon.com

(AMZN). “With a marketplace four times larger than the U.S., that’s a pretty compelling case,” says Albert Brenner, director of asset allocation strategy at People’s United Advisors. 

The dominant Chinese players also have more room to grow, argues Dara White, global head of emerging markets equity at Columbia Threadneedle Investments. Tencent, for instance, hits users of its Moments social media platform with just four ads a day, compared with 25 for U.S. counterpart

Facebook

(FB)—lots of runway to milk more revenue. 

But second-tier Chinese tech stocks like e-commerce rivals

JD.com

(JD) and

Pinduoduo

(PDD), and food-delivery champion

Meituan Dianping

(3690. Hong Kong), have all doubled this year, entering nosebleed territory that is pushing investors into alternatives. Columbia’s White has his biggest country overweight in Brazil, where he is focused on a newer wave of innovators, such as e-commerce platform

MercadoLibre

(MELI), payments providers

PagSeguro Digital

(PAGS) and

StoneCo

(STNE),  and

Magazine Luiza

(MGLU3.Brazil), a traditional retailer shifting rapidly online. “You’re not buying Brazil, you’re buying these excellent companies that weren’t even listed a few years ago,” he says. 

Vontobel’s Bandsma favors Indian IT outsourcers like

Tata Consultancy Services

(TCS.India) and

HCL Technologies

(HCLT.India). He’s also dipping into some beaten-down old-economy stalwarts in Latin America, like Mexican drinks provider

Fomento Economico Mexicano

(FMX),

Walmart de Mexico

(Walmex.Mexico) and Brazilian brewer

Ambev

(ABEV). In June, Barron’spointed out a number of these companies were poised to keep climbing.

Notably absent from the conversation is anxiety over U.S.-China trade tensions, which drove Chinese share movements last year. Washington’s fitful moves against particular companies won’t stop China reaping its share of the approaching booms in 5G telephony and cloud computing, says
Mehdi Hosseini
, senior equity analyst at Susquehanna International Group. “You’re definitely seeing a rebound in Asian 5G investment, and cloud should come back by spring of next year,” he says. 

More broadly, China’s superior performance controlling and rebounding from the Covid-19 pandemic has made it look less vulnerable to economic attack. Exports to the U.S. amount to a mere 3% of Beijing’s gross domestic product at this point, Columbia Threadneedle’s White notes.

Blockades of key technologies like semiconductors might delay, but not reverse, China’s technological ascendancy, People’s United’s Brenner thinks. “We can hurt the Chinese economy, but not so much as to change the prospective landscape for investors,” he says. 

Whether some of the hot stocks are worth their current prices is another question.