Growth In Disruptive Companies

In this environment of modestly rising interest rates and fuller valuations, we believe innovative companies with the potential to disrupt existing industries, including in emerging markets, could fare particularly well. We see opportunity not only in disruptive technology companies, but also in companies that are using technology to change entire industries. And unlike during past runs in technology stocks, many of these companies have actual earnings and cash flows that can support reinvestment in their businesses, which in turn makes them less reliant on raising capital in the markets at a time when interest rates are climbing.

Emerging markets are particularly attractive to us in this regard. We are at a tipping point in many emerging markets where resources and exports are no longer the primary drivers of growth and of the equity markets. Technology companies now make up a sizable portion of emerging-market stock markets, and these companies have the opportunity to drastically improve economic productivity through things like mobile banking that are hard to replicate in developed economies. The rising middle class should also continue to foster these trends. Emerging-market consumers are not only demanding goods, but also services such as banking, health care and entertainment.

These technological advances and rising consumption should also help reinforce the ongoing structural trends we are seeing in China, India, Indonesia, the Philippines and elsewhere. As growth improves and access to technology increases, we see the rise of urbanization and the burgeoning middle classes consuming more products, further driving growth over the longer term.

Stephen H. Dover, CFA, is executive vice president and head of equities, for Franklin Templeton Investments and chief investment officer for Templeton Emerging Markets.
 

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