2021 saw a 27% rise in the S&P500 and the tech-heavy NASDAQ rose 21%. The returns were not uniformly distributed, though. MSCI EM fell by 5% and emerging markets e-commerce firms (or Baby Amazons) performed poorly, falling from grace after a red-hot 2020.
We see two main reasons for the underperformance:
1) China's tech crackdown
The China crackdown sent shivers down the spines of investors and had a negative impact on the overall tech sector, especially EM. Our index of Baby Amazons has fallen by 23% since 1 July. Although our Food Delivery Index has rallied (mainly because of Zomato's strong showing), Meituan Dianping, the largest player, fell by 25% last month.
EM tech stocks outside China, such as Jumia and Sea Ltd, have suffered by association. There is a perception that they could be subject to the same regulatory challenges as Chinese tech stocks. Moreover, the valuation of these stocks had been driven by the prospect of acquisitions by Chinese tech leaders, such as Alibaba and Meituan Dianping. The sell-off has taken the wind out of this particular valuation driver.
2) Lower revenue growth for the Baby Amazons
The first year of the pandemic was a bonanza for the Baby Amazons and the lockdowns drove gross merchandise value (GMV) higher. There was a burst of online shopping in Latin America, ASEAN and Africa, but, in 2021, revenue growth became more tepid.
2022 could see the Baby Amazons rally, but investors need to be selective
Emerging markets have the highest potential for e-commerce growth. A study by PayU entitled The Next Frontier underlines the drivers of this transformation in the Covid era. The report stresses the secular trends that have made EM e-commerce a compelling proposition are gathering momentum including higher smartphone penetration, wider consumer choice and greater broadband usage. Covid merely hastened these trends in 2020.
In India, the number of smartphone users now exceeds 500mn, which is twice the number of smartphone users in the EU. And there is a further upside, with smartphone penetration at only 36%. Similarly, Latin America's smartphone user base could more than double by 2025 to 424mn, according to the report.
Generally, revenue growth forecasts for Baby Amazons are pointing to a rally in 2022, albeit with unevenness between firms. Revenue growth expectations in 2022 range from 22% to 68%.
We therefore urge investors to focus on the Baby Amazons that are dominant and well-funded. Jumia, MercadoLibre and Sea are our top Buys. Bukalapak by contrast has serious vulnerabilities and we recommend a Sell.