LONDON (Reuters) - Not very long ago, a 17 percent oil price fall would have sent emerging market stocks into a tailspin. But this year they are set for their best first half since 2014.
The reason? Like much else, emerging equities have been transformed by technology.
Just like the high performing U.S. tech shares -- Facebook, Amazon, Netflix and Google that were dubbed FANGs before Google's parent was renamed Alphabet -- the so-called BATs, comprising Chinese internet trio Baidoo, Alibaba and Tencent have changed an emerging equity landscape once heavy in energy and mining firms.
But the BATs are just a small part of a whole "new economy" story in emerging markets, where the biggest companies by market capitalization are now high-tech conglomerates Samsung (005930.KS), Tencent (0700.HK), Taiwan Semiconductor (5425.TWO), Alibaba (BABA.N) and South Africa's Naspers (NPNJn.J),
Alongside a host of smaller IT or information technology, firms, mainly Asia-based, they comprise over a quarter of the index cap, on a par with banks and significantly above the 7 percent weight of energy firms. (Graphics on 'Asset performances YTD and post-Brexit vote' - bit.ly/2urtY3r)
A decade ago, the share of energy in the MSCI emerging market index was over 15 percent, while IT was under 12 percent, MSCI data shows.
"You are now getting the index composition effect with the BATs - the huge internet companies which are the (Chinese) equivalent of the FANGs in the U.S," said Julian Mayo, portfolio manager at Charlemagne Capital.
"One of the biggest myths of emerging markets is that they are commodity dependent and more specifically oil-dependent, when the reality is the four biggest markets, China, Korea, Taiwan and India are big importers of commodities," Mayo added.
That may explain why, when Brent crude has posted its worst first-half since 1998, MSCI's emerging share index has risen around 17 percent.
Usually the index moves in lock-step with oil prices but since last year that correlation has been disrupted:
Investors have been unfazed by oil's drop, having poured more than $40 billion into emerging equity funds year-to-date.
Meanwhile, as the commodity supercycle has ebbed and crude prices have halved from early-2014 levels, the value of erstwhile giants Gazprom (GAZP.MM), PetroChina (601857.SS) and Petrobras (PETR4.SA) has taken a hit; Russia's Gazprom, the biggest MSCI EM stock in 2007, does not make the top 10 in 2017.
Instead, a blistering U.S. tech sector rally, with gains of nearly 20 percent .SPLRCT has lifted emerging IT shares.
"IT is now bigger than materials and energy in the benchmark which is a relatively novel development in a historical context" said Kiran Nandra-Koehrer, senior product specialist in Pictet Asset Management's emerging equities team.
While IT is likely a "long-term structural story" in emerging markets, chances of the sector balance tilting back again toward oil hinges at least partly on whether the commodity super-cycle will make a comeback, she said.
But with shale and renewable energy increasingly cost-effective, that looks unlikely in the near future.
Emerging markets have not severed energy links and countries such as Russia, Colombia and Nigeria still rely on crude exports. Indeed, equity resilience showed signs of cracking earlier in June as oil prices headed toward $40, while commodity-heavy Russian stocks are this year's worst performers.
Many investors draw parallels with U.S. junk-rated bonds, almost a fifth of which are energy firms but are also showing better resilience to the oil price dip than during the 2014 price collapse as their business models evolve.
Patrick Esteruelas, head of research at EMSO Asset Management, said a similar oil dip at the end of 2015 had fed through from the U.S. junk bonds to emerging markets.
"If oil takes another leg lower and creates a credit event in U.S. high-yield, that can spread to EM," he said.
Others note the improved global backdrop since the last oil price reversal.
"There are enough compensating factors to have a bit of decoupling. It doesn't mean the relationship is broken for ever but the level of oil price which starts to have a negative impact on emerging markets or U.S. shale is probably lower than before," said Valentijn van Nieuwenhuijzen, chief investment strategist with NN Investment Partners.
But there is another positive effect from the IT sector's greater weighting, namely IT firms' higher return on equity (ROE), a key measure for stockpickers as it reflects how well a company uses shareholders' capital to generate returns.
Currently, the emerging IT sector's average ROE is almost twice that of energy firms and well above the index average.
A Morgan Stanley report on the subject noted the shift in the MSCI index "away from lower ROE, higher leverage, and excess capacity industries toward the higher ROE, lower leverage, non-capacity challenged New Economy industries."
It called IT's greater emerging markets weight "a structural positive that bodes well for the index's future performance."
Editing by Jeremy Gaunt