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David Kimberley
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Updated 11 Aug 2023
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Disclaimer

This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. This material should be considered as general market commentary.

Bombarded as we are with relentless newsflashes about how AI is on the cusp of creating some kind of utopian future, it is easy to forget how impactful technology can be. For this author, it is now almost a given that payments, investments, parking fees, and taxi hailing can all be managed with a few clicks on an iOS device. This marks a change from a decade ago when I was still lumbering away with a ‘dumb phone’ and occasionally had to turn up at a bank branch to manage my finances.

However, as that implies, much of the change for technology consumers has been one of upgrading or simplifying access to services, as opposed to accessing them in general. You may find it much easier to manage your finances today on your iPhone, but it is very unlikely that you had no bank account prior to acquiring one.

The situation has been rather different in emerging market countries, where technology has led to many people accessing ‘official’ banking and payments services for the first time. As an illustration of this, one survey from consulting group EY in 2019 found that the top five countries with the widest adoption of digital financial services were all in emerging markets.

This was something that cropped up in our recent conversation with Dominic Scriven, Chairman of Dragon Capital, the asset management group that manages Vietnam Enterprise Investments (VEIL). Smartphone adoption is close to 75% in Vietnam, which has one of the highest penetration rates of the technology in Asia.

This has filtered into the VEIL portfolio, partly as the trust has a large weighting to financials and many people are opening their first accounts on mobile devices, but also because it has massively opened up the domestic stock market to private investors.

Retail participation in the stock market has tripled since digital ID verification was introduced in August 2020, with over 7m private investors now invested in local equities. It would be easy to write these people off but, beyond generating revenue for firms that VEIL has exposure to, their activity has also significantly increased the liquidity of the market, as measured by average daily turnover volume (ADTV). Higher ADTV is a pre-requisite for the country to gain ‘emerging market’ status – something that would in turn result in substantial fund inflows because of the consequent inclusion in emerging market indices.

Vietnam is not alone in seeing substantial change due to technological development. In 2012, only 0.6% of India’s population had access to the internet via a mobile device. Today that figure is estimated to be just under 71%, according to research published in July by Statista.

At the same time this growth took place, the government rolled out a country-wide digital ID system, known as ‘Aadhar’. The system was launched in 2010 and more than 1.2bn people, over 90% of the Indian population, have signed up for it since.

To top this off, the government also launched an instant payments network, the Unified Payments Interface (UPI), in 2016. It should be noted that the US equivalent to this was only launched this year and was partially based off the Indian model. Much like in the UK, with the launch of electronic  money institutions and open banking APIs, banks and other financial companies can build technology on top of the UPI  to provide faster and easier to access payment services.

These three developments have combined to open up financial services dramatically in the past decade in India. According to the International Monetary Fund (IMF), less than a third of Indians had a bank account prior to the launch of Aadhar.

The ability to verify your identity quickly and simply meant that bank accounts could be opened more easily and, by 2019, over 600m Indians had opened a bank account using their Aadhar ID. Digital payments are also now by far the most widely used payment method in the country according to the IMF.

These changes have been reflected in the Indian stock market. Research published in 2021 by Oaklane Capital, an asset management group focused on Indian equities, shows that the weighting of financials in the Nifty 50, an Indian stock index,  increased from 19% in 2008 to 29% in 2016 and then again to 37% in 2021. Data published at the end of July by the National Stock Exchange of India shows that the sector is now at 37.7% of the index.

This is not necessarily a positive in and of itself but is a reflection of the meaningful impact technological developments can have. Speaking at our emerging markets event earlier this year, Schroder Asian Total Return (ATR) manager Robin Parbrook made the point that there is a tendency among emerging market investors to see certain secular trends as leading to positive returns for equity investors, whether it be GDP or population growth.

For this author at least, there can almost be an inversion of this, where the mention of technology, as it has become so ubiquitous, can make you shut down and lose interest. But as emerging market funds show, technological progress does make for massive change – and creates interesting investment opportunities too.

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