Despite the US-China trade war, Franklin Templeton Emerging Markets Equity’s Sukumar Rajah doesn’t think the opportunity set for emerging markets is lost. He explains how a saturated smartphone market could create innovation opportunities in emerging market countries in Asia.

As tensions remain high over ongoing US-China trade negotiations, we recognize all eyes will be on the next development in the tit-for-tat tariff saga. Given the globalized nature of the supply chain, technology products are at the center of this dispute, causing concern among some emerging market investors. Some commentators have suggested US President Donald Trump’s decision to delay an increase in tariffs on some Chinese goods until December was based on a reluctance to see prices increase for mobile phones, laptops and video game consoles in the run-up to the US holiday season. However, US-Chinese tensions are not the only issue facing the technology sector.

Moreover, the deterioration in Korean-Japanese relations over the past year due to historical issues has also led to uncertainty in the technology sector. Japan has tightened rules on exports of three key materials to South Korea’s semiconductor industry.

While the trade spat between Japan and South Korea has yet to have a material near-term impact, it has led to lower visibility for the industry’s medium- to longer-term outlook as the timeline for a resolution between South Korea and Japan is unclear. If the Korea-Japan trade issues were to persist or worsen, crucial smartphone component makers such as Samsung Electronics and Hynix could face both production bottlenecks and challenges moving towards next-generation technology, as it will take time to localize and/or shift the supply change.

Despite this uncertainty, we remain positive on the structural trends in the technology hardware industry and still see pockets of opportunity within the smartphone industry, particularly for companies with strong innovation capabilities and financial characteristics.