Investors can look to a targeted exchange traded fund strategy to capture digital transformation in India.
In the recent webcast, Emerging Market Internet Trends: The Rising Generation of Digital Consumers in India, Kevin Carter, Founder and CIO, EMQQ, underscored the opportunity in the emerging economies, such as their favorable demographics that continue to support consumption-based growth. He pointed out that 85% of the global population resides in developing economies. Emerging markets and frontier markets also boast some of the youngest demographics, with about 8.8 times the number of those under the age of 30 when compared to developed economies.
Looking ahead, Carter argued that middle-income consumers will likely take on a greater role in the global economy, especially in the emerging countries. According to McKinsey & Co. projections, an expected 4.2 billion people will constitute the consuming class by 2025, and the emerging markets could account for $30 trillion in consumption, with developed markets making up $34 trillion. In comparison, emerging market consumers only generated $12 trillion in world consumption back in 2010.
Investors have used popular broad emerging market funds to track benchmarks like the MSCI Emerging Market Index, but those EM funds are more likely exposed to state-owned enterprises, which are owned and controlled by the government. These so-called SOEs are large, inefficient, have poor corporate governance, and may show widespread corruption. Among the largest or most popularly traded emerging market ETFs, 30% of underlying holdings are allocated to SOEs.
Alternatively, Carter pointed to assets like the Emerging Markets Internet & Ecommerce ETF (NYSEArca: EMQQ), which includes access to EM companies related to online retailers or the quickly expanding e-commerce industry. To be included within the ETF’s underlying index, companies must derive the majority of their profits from e-commerce or Internet activities like search engines, online retail, social networking, online video, e-payments, online gaming, and online travel.
Carter said ongoing trends like the growing reliance of smartphones is a major catalyst in changing global consumption patterns. The rise of e-commerce has also paralleled the increased adoption of smartphone usage and the declining cost of the devices themselves.
Meanwhile, the adoption of smart devices and internet penetration among developing economies remain in the early phases, so there is still plenty of room to run. For example, while 82% of U.S. citizens have access to smartphones, Chinese smartphone users make up about 61% of its overall population, and India’s smartphone users only constitute 32% of its population.
Looking at the current Chinese internet segment, Carter warned of China’s increased antitrust and monopoly scrutiny.
“Sentiment around China and Alibaba is quite negative and will continue to pose real and headline risks,” Carter said.
Carter also highlighted the opportunity in India, adding that the developing country could become the next emerging market growth story after China. India is expected to become the most populous country in the world soon, and could become the third largest global economy. Supporting the growth, 493 million people in India come from the younger Generation Z demographic, or more than same age group as in China and the U.S. combined.
India is embarking on expanding its own presence, with Prime Minister Narendra Modi pushing for “Atmanirbhar Bharat”, or a self-reliant India. The country still only offers a few listed internet companies, but initial public offerings are beginning to increase.
Financial advisors who are interested in learning more about opportunities in the emerging markets can register for the Thursday, April 8 webcast here.