Which came first the rally in emerging markets or the boom in its tech stocks? The tech sector has become the biggest single grouping in the EM universe this year, and that's for the first time since the dot-com boom. Cue several, as yet, unsuccessful efforts to label EM texts with a catchy equivalent to the US FANGs-- Facebook, Amazon, Netflix, and Google. But equating the EM sector with hot US techs sells it short. Hardware, as well as internet enthusiasm, is what's driving this rally.
Emerging market equities are enjoying their best year since 2009, and the benchmark index is up 17%. Earnings upgrades are the biggest driver, particularly in Asia, which is 2/3 of the index and that's all of its tech stocks too. Even profits of unloved Chinese groups are generally expected to rise, giving Asia EM stocks one of their best-ever runs of improving profit forecasts-- that's 12 months and counting.
Now that tech sector up 38% this year has led the advances. Within that, the leaders include Tencent and Alibaba up 43% and 62%, respectively. They're not the only beneficiaries. Samsung Electronics is up 35%, and it might become the world's biggest chip maker. Taiwan Semiconductor, the world's biggest chip foundry has gained 18%. Combined, the 4 have added $325 billion in capitalisation.
Tech hardware stocks are benefiting from several trends. One is a perennial optimism around the rising emerging market economy's disposable income, as a middle class develops. Another, more specific theme, is the rise in global demand for chips and other specialised components to power an increasing range of devices that we all like. Now after years of consolidation, supply, particularly of chips, is limited, and most of that sits in emerging Asia.
There's also the looming launch of Apple's iPhone 8 models. Now speculation abounds as to which company has got which share of the orders. About 1/3 of Taiwan's tech sales are iPhone-related according to Citigroup. Yet, in spite of the rally and the hype, EM techs are still cheaper than their US counterparts. They're trading at 15 times earnings, compared with 18 times. Now that might spur tech-lovers, whether they're an internet enthusiastic backing Alibaba or fans of Samsung to push this rally further still.