Emerging markets move away from their reliance on commodities

Developing countries are becoming less reliant on cyclical commodities and moving into more lucrative areas such as technology

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It's time to move beyond emerging market stereotypes, says investment manager Franklin Templeton in a research note. A bet on developing countries once meant buying into politically-volatile markets dependent on cyclical commodities. But today the biggest sector in the MSCI Emerging Markets index is technology. It accounts for 28% of the market.

The region's tech players are as likely to be leading global innovation as following it. "Unhindered by sunk investments in legacy systems," businesses in emerging markets have more freedom to come up with something genuinely new in sectors ranging from mobile banking to electric vehicles, says Andrew Ness of Templeton's Emerging Markets trust. "Take Chinese e-commerce," which today makes up a "far higher percentage of retail sales in China than in the US." Without legacy credit-card networks, Chinese consumers are also migrating directly to digital payment platforms run by Alibaba and Tencent.

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India is also leading the new tech charge, notes Henny Sender in the Financial Times. The value of the country's e-commerce transactions is just a fraction of that of China's, but a growing middle class means rocketing demand for a wide variety of services and easier ways to pay. The country has plenty of savvy entrepreneurs, although with venture capital playing a big role, "it may still be a while before investors in public markets have a tasty menu to pick from".

Not all emerging markets are created equal. Materials and energy businesses, once worth 30% of the MSCI index, now make up just 15.7% of it, although that number still goes as high as 27% in nations such as Brazil. Investors will increasingly need to differentiate between emerging markets.

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