Beaten emerging market tech stocks that look like bargains

Emerging market tech stocks took a hit. MercadoLibre might be worth a look for investors looking to buy the dip.

The time of dreams

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If you’re inclined to buy the decline in US tech stocks, you might consider the crater in emerging market tech stocks.

the


Emerging markets Internet and e-commerce

The traded index fund (ticker: EMQQ) is down more than half from its peak in February. There should be some bargains in this wreck.

“A lot of quality stocks have been thrown out with the bathwater,” says Adam Montanaro, chief investment officer for emerging markets equities at abrdn.

But which ones? A near-consensus choice among emerging market managers is


Tencent Holdings

(700.Hong Kong), the Chinese social media and gaming giant. Its shares have fallen by a third over the past year. The company has been “much more aligned with the Chinese state” than many peers, Montanaro says, adopting restrictions on underage gaming. He is also aligning himself with investors by selling chunks of his huge non-core holdings and returning the money.

“Little has changed with Tencent’s business model. All that has happened is that the stock has revalued,” says Charlie Dutton, fund manager for Asia-Pacific at Ninety One. .

Opinion is more divided on the Chinese megacap rival


Alibaba Holding Group

(BABA). Shares are pretty cheap, up 60% since founder Jack Ma battled with Beijing state bankers at the end of 2020. However, the political clouds are still low.

Alibaba’s financial arm, Ant Group, is very publicly suspected of bribing officials in its home province of Hangzhou. Ant’s outlook, which has led Alibaba’s growth forecast into better days, is looking increasingly dim, says Jason Hsu, chief investment officer at Rayliant Global Advisors. “Fintech was the big secret weapon of internet companies,” he says. “That doesn’t seem to be in the cards now.”

Two non-Chinese internet superstocks,


MercadoLibre

(MELI) in Latin America and


Wed

(SE) in Southeast Asia, stayed aloft longer, then crashed more abruptly.


MercadoLibre
,

which is down by half from the September peak, looks like the best prospect for a rebound. “We really like MercadoLibre,” says Damian Bird, head of the emerging markets growth team at Polen Capital. “It’s cash flow positive and it’s taking market share from companies that aren’t.”

Tom Masi, co-head of emerging wealth strategy at GW&K Investment Management, doesn’t like MercadoLibre. The company’s e-commerce thrives on commissions of up to 20%, which will shrink as it faces increased competition from heavy hitters like


Wal-Mart of Mexico

(WALMEX.Mexico), he predicts. “Our problem with MercadoLibre is an unsustainable turnout,” he says.

Sea, whose shares have slumped by two-thirds since November, has a more acute problem: earnings are receding beyond the horizon as capital costs rise. “It’s hard to see exactly when this company breaks even,” says Ninety One’s Dutton. “Maybe 2023, maybe 2025.”

These investors have their own choices beyond the big tech names in emerging markets. Masi is optimistic about


Baidu

(BIDU), the Chinese search engine looking for a second act in artificial intelligence and autonomous driving. “You buy the main business at the current price,” he says. Abrdn’s Montanaro loves Chinese enterprise software provider


Yonyou Network Technology

(600588.China) and Russian job site


Headhunting group

(RHS).

Managers are paddling through at least two cross-currents: Emerging markets may be underinvested after lagging massively behind the U.S. in 2021. And many of the hottest tech companies of yesteryear may never make it into black.

Choose carefully, but don’t miss the opportunity.

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