Exchange traded fund investors should consider the fundamental changes taking place in developing economies, the preference for online shopping via the smartphone, and how Gen Z will drive the next leg of this growing digital revolution, will delve into these new names, the fundamental changes in developing economies, the preference for online shopping via the smartphone, and how Gen Z will drive the next leg of this growing digital revolution.
In the recent webcast, Emerging Markets 2022 Outlook & The Coming IPO Wave, Kevin T. Carter, founder and CIO of the Emerging Markets Internet Ecommerce ETF (EMQQ) and the Next Frontier Internet & Ecommerce ETF (FMQQ), highlighted the opportunity in emerging economies, like their favorable demographics that continue to support consumption-based growth and the fact 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 compared to developed economies.
Carter pointed out that middle-income consumers will take on a more significant role in the global economy, especially in 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 in 2010.
While investors have utilized popular broad emerging market funds to track benchmarks like the MSCI Emerging Market Index, those EM funds are overexposed 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.
Looking ahead, Carter believed that investors should focus on the growth of consumers or increased consumption trends in developing economies. Specifically, ongoing trends like the growing smartphone reliance is a significant 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.
Additionally, 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 63% of its overall population, and India’s smartphone users only constitute 32% of its population.
As a better alternative to traditional emerging market funds, Carter highlighted a focused strategy, the Emerging Markets Internet & Ecommerce ETF (NYSEArca: EMQQ), which includes access to EM companies related to online retailers and the quickly expanding e-commerce industry. To be included within the ETF’s underlying index, companies must derive most 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.
The emerging markets are also enjoying a booming pipeline of new initial public offerings that include a range of new internet names to tap into the shifting consumer trends toward online shopping. Looking ahead, Carter believed that emerging market growth would be supported by the internet sector, especially given the shifting demand among emerging market consumer for smartphones and internet via mobile broadband. Consequently, EM e-commerce models are “leapfrogging” traditional models and are growing five times as fast as consumption.
However, Carter warned that EMQQ has primarily been a China story as China makes up 62% of EMQQ’s underlying portfolio, which doesn’t come as a surprise since China’s e-commerce sales are 3.9 times larger than all other emerging markets countries combined. However, this does not mean that investors should ignore the next frontier of consumer markets, like many frontier and developing economies are seeing a slew of new e-commerce or internet retail companies coming online.
Consequently, investors can turn to something like the recently launched Next Frontier Internet & Ecommerce ETF (FMQQ) to capture these more favorable trends in frontier markets. Strong economic growth, attractive relative valuations, and a concentration on consumer and internet names — the most attractive sectors — could be an excellent opportunity for investors for a more targeted approach to these frontier economies. Carter also noted that the next frontier population is 4.0 times larger than China, which provides an even bigger consumer base to support a growing internet and e-commerce industry ahead.
Financial advisors who are interested in learning more about emerging and frontier markets can watch the webcast here on demand.