Emerging Markets Equity: Cloud Software and ESG Power Ahead

Angus Shillington | Deputy Portfolio Manager, Van Eck Associates Corporation
Dominic Jacobson | Analyst, Van Eck Associates Corporation
Oksana Miller | Senior Product Manager, Van Eck Associates Corporation


Emerging markets have seen significant digital transformation over the past two years, with growth in the software space suggesting potential for further innovators and disruptors.

The COVID-19 pandemic catalyzed and accelerated major shifts in digital consumer behavior. Put simply, in most countries digital transformation (“DX”) took off, especially in the more under-penetrated countries in emerging markets (“EM”). The biggest growth categories tended to be in the software space (must-haves such as video conferencing, remote desktops, security, etc.). With the availability of vaccines and the outlook for improving economic conditions globally, we believe that software demand and spending will continue to accelerate, transform and, at the same time, transition from on-premises enterprise solutions into the cloud, CRM,1 HCM,2 Financials, Analytics, etc.3 In this research piece, we take an in-depth look at the investment case for cloud software and ESG and highlight two emerging beneficiaries in the space: Reliance Industries Limited (“RIL” or “Reliance”) (4.67% of Strategy assets)4 and GDS Holdings Ltd. (“GDS”) (0.92% of Strategy assets).5

Sustainable Digital Transformation—Cloud Software is the Future

Digital transformation will continue to be a significant secular driver of the software industry in general and cloud adoption in particular, pandemic or not.6 We expect it to become a growth tailwind for young companies scaling their businesses (i.e., AI,7 Big Data,8 RPA,9 CRM, Collaboration, IaaS,10 PaaS,11 DevOps,12 etc.), as well as for established leaders in the space.

Fast-growing digital adoption and integration are unlikely to reverse and, we believe, will continue to drive long-lasting changes in consumer behavior and enterprise efficiency post-pandemic. On the consumer side, taking simple retail banking as an example, customers who shift from bin-branch to using an app tend not to ever switch back – giving banks better data to better serve that customer and giving more knowledge to upsell/cross-sell their services and products. The same is true for replacing internal functions in all sizes of businesses where, once HR or payroll is digitized, for example, that trend is unlikely to reverse in the future.13

Cloud Software—A $1T Total Available Market (“TAM”)

Driven by Digital Transformation

Cloud software is an attractive investment opportunity due to its large TAM—and the highly saleable and profitable nature of most software business models. For software companies that are well positioned and can execute, this can translate into compelling, multi-year, high-growth, highly-profitable business models. Even after the most recent accelerated digital adoption, cloud revenues are still less than one quarter of a percentage point of global GDP growth.

Chart 1

Cloud Software Has Been Gaining an Increasing Share Within the Global GDP

Cloud Software Has Been Gaining an Increasing Share Within the Global GDP

Source: Goldman Sachs Global Investment Research. Data as of January 21, 2022.

However, the cloud is not just a substitute for traditional enterprise IT. Digital transformation drives new multibillion-dollar software categories, including Collaboration, UCaaS,14 e-commerce, AI, Big Data, DevOps and RPA, while potentially increasing adoption rates for established categories such as CRM, HCM, ERP,15 Vertical Apps,16 Creative Design and Business Intelligence. As a result, this relative 7x multiple could go even higher as businesses digitize.

TAM = (1) cloud transition of existing markets + (2) cloud opening up the SMB market + (3) software automating new  areas + (4) communications becoming software + (5) innovation driving incremental spend.

Source: Goldman Sachs Global Investment Research. Data as of January 21, 2022.

Cloud Software Investing Framework

Software investing is a balanced blend of quantitative and qualitative factors. For newer companies and emerging markets, we tend to see similar types of solutions as we see in developed countries—CRM, accounting, etc. But the EM versions of those businesses tend to be “innovated” and adapted for their home countries where more localized problems are solved (i.e., tax or accounting standards) or maybe costs are reduced to map with affordability. Regardless, the same highly scalable and attractive profitability dynamic prevails.

Chart 2

Understanding the Cloud Software Framework and What Goes Into it Today is Key

# 8 Key Factors Tangible Intangible
1) TAM Top-down sizing
Bottom-up sizing
  • Is pricing sustainable?
  • It is a feature or a real market?
2) Secular Themes End consumer spending more on DX software solutions
  • Is it a pull-forward of demand or a permanent shift?
  • Is it a feature or a real secular trend?
3) ESG Carbon neutral = data center usage + carbon offsets
Company becoming a large platform
  • What are the social impacts of AI products?
  • What are the regulatory or security breach risks?
4) Entry/Exit Points Technical analysis
Sector historical valuation parameters
  • When to buy? Rotation or short-term execution?
  • When to sell? Valuation ahead of fundamentals?
5) LT Framework Return Long-term (“LT”) revenue/margin scenarios
Compounded return outcomes based on LT scenarios
  • Which scenario is more likely?
  • What are possible risk-reward scenarios?
6) Unit Economics Lifetime value (“LTV”) calculation
Customer acquisition cost (“CAC”) calculation; LTV/CAC
  • How does competition impact customer lifetime?
  • How does upsell and cross-sell impact CAC and cost to serve?
7) Platform/Best of Breed Diversified revenue mix
Best of breed gaining market share
  • Are there actual synergies between the revenue streams?
  • Can the best of breed “cross the chasm”?
8) Competitive Moat Revenue per R&D17 dollar
Size of install base
  • Are there disruptive technologies?
  • Why is the install base demanding bigger price discounts?


Source: Goldman Sachs Global Investment Research, BofA Global Research. Data as of January 21, 2022.

Cloud Software and ESG—Moving in Tandem

As ESG continues to gain momentum across sectors and regions globally, we believe key areas within the software space, more specifically public cloud and SaaS, have the potential to drive greater efficiency in enterprise computing architectures, while also reducing carbon emissions. With developing countries having the deepest pools of analogue processes, cloud software helps reduce many forms of inefficiency from power consumption to paper record keeping.

Reliance Industries Limited (“RIL”) | India / Energy / 4.67% of Strategy Assets

Reliance Industries is a Fortune 500 company and the largest private-sector corporation in India.

  • The company has evolved from being a textiles and polyester business to an integrated player across innovation-led digital services, entertainment, retail, materials and energy. 2020-2021 were strong years for Reliance.
  • Practically all of Reliance consumer businesses are now app-based and run through apps on customer/consumer smartphones and, as such, are hugely reliable on the cloud.
  • After a series of transactions to raise capital for its digital services and retail platforms, the company attracted buyers like Facebook, TPG and Silverlake Capital.
  • The benefits are threefold: first, they bring the net debt for the group to below zero; second and third, they backfill knowledge deficits and bring validation from industry participants of Reliance’s digital and retail ambitions.

Chart 3

Reliance Jio’s Market Share Is Expected to Reach 44% by 2022

Reliance Jio's Market Share Is Expected to Reach 44% by 2022

Source: TRAI, Goldman Sachs Investment Research. Data as of May 5, 2020. E is defined as Estimated.

GDS Holdings Ltd. (“GDS”) | China/Information Technology/0.92% of Strategy assets

GDS is the largest internet data center operator in China.

  • GDS owns and operates the physical infrastructure on which the cloud is built. According to IDC, the public cloud market in China is expected to grow at a 35% CAGR between 2020-2024e.18
  • The majority of GDS data centers are located in Tier 1 cities where supply is tight and contract pricing is favorable due to government restrictions on land and power consumption.
  • Management has an exceptional operating track record which has enabled them to attract and retain the largest and fastest-growing internet companies in China as tenants.
  • Management is targeting 100% renewable power and carbon neutrality by 2030 by Direct Power Purchase arrangements,19 Renewable Energy Certificates,20 onsite renewable energy systems and direct renewable energy investments.

Chart 4

Areas of Focus to Minimize Environmental Impact

Areas of Focus to Minimize Environmental Impact

Source: Company Data. Data as of December 31, 2020.


The shifting landscape in consumer behavior and spending habits has been positive for the VanEck Emerging Markets Equity Strategy. Our focus on many of these structural growth areas has led us to invest in the digital transformation names, including cloud software, across sectors and regions in emerging markets around the world. Furthermore, given the scale and platform of DX and its impact, we believe the rise of cloud software in EM provides the rationale for continued investment in innovators and disruptors in the space as a long-term, sustainable and structural growth theme within the portfolio.

Originally published by VanEck on February 23, 2022.

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1 CRM is defined as Customer Relationship Management. It refers to the principles, practices and guidelines that an organization follows when interacting with its customers. Ultimately, CRM serves to enhance the customers’ overall experience.

2 HCM is defined as Human Capital Management. It transforms the traditional administrative functions of human resources (HR) departments—recruiting, training, payroll, compensation and performance management—into opportunities to drive engagement, productivity and business value.

3 Source: Goldman Sachs Global Investment Research. Data as of January 21, 2022.

4 Data as of January 31, 2022.

5 Data as of January 31, 2022.

6 Source: Goldman Sachs Global Investment Research. Data as of January 21, 2022.

7 AI is defined as Artificial Intelligence. It leverages computers and machines to mimic the problem-solving and decision-making capabilities of the human mind.

8 Big Data refers to the large, diverse sets of information that grow at ever-increasing rates. It encompasses the volume of information, the velocity or speed at which it is created and collected, and the variety or scope of the data points being covered (known as the “three v’s” of big data). Big data often comes from data mining and arrives in multiple formats.

9 RPA is defined as Robotic Process Automation. It is a software technology that makes it easy to build, deploy and manage software robots that emulate human actions’ interacting with digital systems and software.

10 IaaS is defined as Infrastructure as a Service. It is a type of cloud computing service that offers essential compute, storage and networking resources on demand, on a pay-as-you-go basis. IaaS is one of the four types of cloud services, along with software as a service (SaaS), platform as a service (PaaS) and serverless.

11 PaaS is defined as Platform as a Service. It is a complete development and deployment environment in the cloud, with resources that enable you to deliver everything from simple cloud-based apps to sophisticated, cloud-enabled enterprise applications. You purchase the resources you need from a cloud service provider on a pay-as-you-go basis and access them over a secure Internet connection.

12 DevOps is the union of people, process and technology to continually provide value to customers. DevOps enables formerly siloed roles—development, IT operations, quality engineering and security—to coordinate and collaborate to produce better, more reliable products. By adopting a DevOps culture along with DevOps practices and tools, teams gain the ability to better respond to customer needs, increase confidence in the applications they build and achieve business goals faster.

13 Source: Goldman Sachs Global Investment Research. Data as of January 21, 2022.

14 UCaaS is defined as Unified Communications as a Service. It is a cloud-delivered unified communications model that supports six communications functions: enterprise telephony, meetings (audio/video/web conferencing), unified messaging, instant messaging and presence (personal and team).

15 ERP is defined as Enterprise Resource Planning. It is a process used by companies to manage and integrate the important parts of their businesses. Many ERP software applications are important to companies because they help them implement resource planning by integrating all of the processes needed to run their companies with a single system. An ERP software system can also integrate planning, purchasing inventory, sales, marketing, finance, human resources, and more.

16 A vertical application is software that is defined and built according to a user’s specific requirements in order to achieve specific functions and processes that are unique to that user. It is usually customized for a target enterprise or organization in order to meet its own special needs.

17 R&D is defined as Research and Development.

18 Source: VanEck Research, Company Data. Data as of January 31, 2022.

19 A Direct Power Purchase Arrangement (“PPA”) is an agreement made between a renewable energy generator and an end user in which electricity produced by a wind or solar facility is physically delivered to power the corporate buyer’s operations.

20 A Renewable Energy Certificate is a power purchase agreement between an electrical utility and a renewable energy supplier that commits the parties to participating in an electrical utility’s voluntary renewable energy program for the purchase and sale of energy and capacity.

Please note that VanEck offers investments products that invest in the asset class(es) or industries included in this commentary.

*All company weightings are as of January 31, 2022. Any mention of an individual security is not a recommendation to buy or to sell the security. Strategy securities and holdings may vary.

The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third-party sources is believed to be reliable and has not been independently verified for accuracy or completeness and cannot be guaranteed. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.

Emerging Market securities are subject to greater risks than U.S. domestic investments. These additional risks may include exchange rate fluctuations and exchange controls; less publicly available information; more volatile or less liquid securities markets; and the possibility of arbitrary action by foreign governments, or political, economic or social instability.

ESG integration is the practice of incorporating material environmental, social and governance (ESG) information or insights alongside traditional measures into the investment decision process to improve long-term financial outcomes of portfolios. Unless otherwise stated within the strategy’s investment objective, inclusion of this statement does not imply that the strategy has an ESG-aligned investment objective, but rather describes how ESG information is integrated into the overall investment process.

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