As investors consider the impacts of a growing digital consumer class, they can turn to the companies best positioned to adapt in emerging markets.
In the recent webcast, E-Commerce and Coronavirus: A Boon for Emerging Markets, Kevin Carter, Founder and CEO, EMQQ, underscored a developing opportunity in the emerging economies, notably their favorable demographics that continue to support consumption-based growth. 85% of the global population resides in developing economies, accounting for over 50% of global GDP. 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.
Middle-income consumers will likely take on a greater role in the global economy, especially in the emerging countries. According to McKinsey & Co. projections, there will be an expected 4.2 billion people among the consuming class by 2025, and the emerging markets will make up $30 trillion in consumption, while developed markets will make up $34 trillion. In comparison, emerging market consumers only accounted for $12 trillion in world consumption back in 2010.
While some have already allocated toward the emerging markets, investors who have some exposure 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.
E-Commerce as a Way to Avoid SOEs
As an alternative to these broad emerging market fund strategies with a high focus on SOEs, Carter highlighted the potential opportunity of a targeted developing country e-commerce play to capture a rising middle-income consumer class in the emerging markets. He pointed to ongoing trends like the growing reliance of smartphones as a major catalyst in changing consumption patterns, as well as the greater reliance of e-commerce and online shopping through smart devices. The rise of e-commerce has also paralleled the increased adoption of smartphone usage and the declining cost of the devices themselves.
Carter argued that the adoption of smart devices and internet penetration among developing economies remain in the early phases, so there is still a lot of room to run as more consumers gain access to online retailers. 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 make up 32% of its population.
Furthermore, the increased reliance on mobile devices in this has fueled rapid growth in mobile payments for online transactions. For instance, in China, the total online transactional value of mobile payments made up $25.9 trillion in 2018, compared to $15.4 trillion in 2017, $9.2 trillion in 2016, and $1.9 trillion in 2015.
As investors look for ways to capture growth in the emerging markets, some may look to a targeted consumer-sector EM play, such as 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.
While COVID-19 has pummeled the global economy, Carter argued that internet and e-commerce based business models are receiving a slight boost, notably from an increase in demand for widely adapted e-commerce businesses. The shift in day-to-day habits from lockdown measures to contain the pandemic has accelerated the adaption of certain platforms, such as distance learning, telemedicine, and food delivery, among others. China also looks like the one economy that resumed activity quickest, with estimates of 70% to 80% levels of economic activity back online.
Carter also pointed out that EMQQ might be particularly well-positioned as it includes a heavy focus on a quickly recovering Chinese economy. China makes up 65% of EMQQ, and it is in the best position of any major economy. E-commerce in the emerging country is increasing in relative importance due to the outbreak, with digitalization expected to stabilize at a much higher level.
Financial advisors who are interested in learning more about e-commerce in the emerging markets can watch the webcast here on demand.