The emerging markets technology sector is poised to enjoy a good year, with increased demand on the ...
The emerging markets technology sector is poised to enjoy a good year, with increased demand on the back of the Federal Reserve's reduction in interest rates. Following the Fed's second interest rate reduction in a month, Taiwan saw its index jump 6.53% in sterling terms, while the South Korean composite index rose 2.83% in sterling terms.
Philip Ehrmann, head of Pacific and Emerging Markets at Gartmore, says: "The emerging markets technology sector has risen by more year to date than the US equivalent This is because of the rate reduction and because emerging market valuations were never as high as those in the US."
Jonathan Asante, emerging markets fund manager at Framlington, agrees that the technology sector has performed well year to date, with demand up after a disastrous 2000.
He notes that Asia is the world's manufacturing base for chips in PCs and mobile handsets, with especially successful companies in Taiwan, and D-Ram manufacturers in Korea.
"The one thing Asian companies are not good at, though, is controlling the prices of chips, which decrease year after year. They do not realise if they invest in excess capacity prices come down, which is what has been happening," he says.
Framlington has holdings in Samsung Electronics, the world's largest maker of D-Rams, which the group believes is attractively valued. Asante also has exposure to Taiwan Semi Conductor, which has seen its share price rise recently and is also attractively valued.
According to Asante, Israel has particularly impressive technology companies. "Israel is the only emerging country which is seeing the invention of new technology and the economy is booming on the back of this," he says.
Ehrmann believes Poland has a nascent technology industry skewed to systems integrators and software, with companies such as Prokom, Computerland and Comarch.
He says: "Prokom sells software to the Polish financial sector and is very domestically-oriented but may look to expand in the future. It has a significant advantage over similar companies in Europe because it is competing in the domestic market and the cost of its skilled workforce is cheaper than elsewhere in Europe. It will be interesting to see how Eastern Europe can compete with Asia and participate in the trend to outsourcing. It is unlikely to have a manufacturing advantage and the region does not have the scale or capital base, but it does have the intellectual capital."
Asante agrees there is a future in outsourcing for Polish software companies from other large Polish companies. "Technology is a very fragmented, localised industry, which is why Poland can survive. However, it is not the same story as in India, which has been playing a US outsourcing game," he notes.
Framlington does not have any exposure to Polish companies. "Most of their big projects come from the government and Polish banks," he says.
"When the banks stop spending, where will their money come from? Their earnings stream is like a contracting business, it is typically very lumpy. They should be on low multiples but they are on high ones."
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