Southeast Asia’s Internet Economy: On a Fast Track

Conditions have been ripe for Southeast Asia’s e-transformation, and COVID-19 has acted as an accelerant, according to Claus Born and Yi Ping Liao of Franklin Templeton’s Emerging Markets Equity team. They see three secular growth opportunities that stand out for investors:  e-commerce, fintech and gaming.

 

 

COVID-19 has fast-tracked internet adoption in Southeast Asia, similar to how the SARS1 outbreak catalyzed digitalization in China more than 10 years ago. Conditions have been ripe for Southeast Asia’s e-transformation. Young and mobile-first populations, improving communication networks and affordable smartphones are among factors that have powered internet services in the region.

 

We see immense potential in Southeast Asia’s internet economy. Amid rapid innovation across the board, three areas stand out to us for the secular growth opportunities they offer.

 

  • E-commerce: The industry remains underpenetrated despite soaring sales. The proliferation of different business models has created scope for even traditional small businesses to participate in digitalization.
  • Financial technology (fintech): Underbanked and cash-reliant populations have reeled in an array of fintech companies. Many offer e-wallets as a gateway to access a wider suite of financial products.
  • Gaming: Successful games have found a global audience. Games are also evolving into social forums integrating chat functions and more modes of entertainment to boost user engagement and monetization potential.

 

Upcoming listings of fast-growing companies in these fields are likely to revitalize Southeast Asia’s equity markets, whose old-economy focus has come under the shadow of North Asia’s new-economy tilt. These listings could also offer diversification from widely held Chinese internet names. We believe that active investors like us, who can blend insights from North Asia’s internet journey with perspectives from our Southeast Asian research teams to analyze distinct local trends, could gain an edge in identifying the best opportunities in the making.

 

What Are the Risks?

 

All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Special risks are associated with investing in foreign securities, including risks associated with political and economic developments, trading practices, availability of information, limited markets and currency exchange rate fluctuations and policies; investments in emerging markets involve heightened risks related to the same factors.

 

To the extent a strategy focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a strategy that invests in a wider variety of countries, regions, industries, sectors or investments.

 

Investments in fast-growing industries like the technology and health care sectors (which have historically been volatile) could result in increased price fluctuation, especially over the short term, due to the rapid pace of product change and development and changes in government regulation of companies emphasizing scientific or technological advancement or regulatory approval for new drugs and medical instruments.

 

Small- and mid-capitalization companies can be particularly sensitive to changing economic conditions, and their prospects for growth are less certain than those of larger, more established companies.

 

China may be subject to considerable degrees of economic, political and social instability. Investments in securities of Chinese issuers involve risks that are specific to China, including certain legal, regulatory, political and economic risks.