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October 2017 | GSAM Connect

EM Viewpoints: The New Digital Finance Age

In our last Viewpoints, we discussed the long-term structural growth opportunity of technology and internet companies in EM. This month, we delve into the new digital finance age developing in EM, which we believe is driving economic growth, causing disruption across industries, and creating new compelling opportunities for fundamental investors.

China has leapfrogged the West, is India next?

China is the world leader in digital payments, currently boasting 500 million users and a market size of $11 trillion, 16 times that of the US.[1] This could quadruple by 2021.1 We believe the primary growth drivers have been higher internet and smartphone adoption, rapid e-commerce development, lower credit card penetration and less regulatory red tape. Additionally, consumer demand for digital finance solutions has been high due to an underdeveloped traditional financial market that is dominated by state-owned banks that focus on corporates and underserve the consumer in our view.


In our view, India could follow in China's footsteps as one of the next EM countries poised for significant growth in digital payments. The number of mobile payment transactions in India is estimated to grow from 2.9 billion last year to upwards of 450 billion in five years and could represent over $4 trillion in value.[2] Demonetization, a government policy that banned common higher-domination currency notes, kick-started India's transition from a cash-based to digital-based transaction society. Improved telecommunication infrastructure (such as the launch of 4G) and a smartphone-savvy millennial population may also support growth.


Interestingly, Artificial Intelligence is enhancing the overall digital payment experience for the EM consumer with smart customer service and facial recognition.1 In our opinion, these enhanced features could drive further consumer demand for digital payments.

Result is better economic growth

Digital finance has the potential to fuel stronger economic growth in EM by increasing job creation (which is arguably better in EM vs Developed Markets due to more favorable demographics), enhancing productivity and increasing investment, as illustrated in the below chart. 

Impact of digital financial services on GDP (2014 through 2025E)

Em_Viewpoints_1710

Investors should be selective

The growth of digital finance in EM creates exciting investment opportunities for investors, in our view. That said, selectivity is crucial. We believe internet companies would not only benefit from the growth of online payment solutions, but also could leverage their user base to cross-sell other financial products like insurance and consumer credit loans. Many of the businesses that produce the electrical components to make these technologies possible reside in EM and we are increasingly finding more of these companies outside the standard EM index. Contrastingly, Asian banks, which tend to be a larger portion of the standard EM index, are less compelling in our view due to their state-ownership, fewer innovative solutions and lack of focus on the rapidly growing consumer market. 


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ABOUT THE AUTHOR

Katherine Bordlemay

Katherine Bordlemay

Emerging Markets Specialist, Fundamental Equity Client Portfolio Management, GSAM
Luke Barrs

Luke Barrs

Emerging Markets Specialist, Fundamental Equity Client Portfolio Management, GSAM

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