Emerging market ETF investors should consider the greater influence of the new consumer wave in emerging markets, the preference for online shopping via the smartphone and a way to gain targeted exposure to the rapidly expanding e-commerce segment.
On the recent webcast (available On Demand for CE Credit), The Trade War is a Buying Opportunity in Emerging Markets, Kevin Carter, Founder and CEO of EMQQ, outlined the case for emerging market exposure, pointing to the favorable demographics, with 85% of the global population residing in developing economies, which also make up about 50% of global GDP. Millennials and Gen Xers also spend 50% more time shopping online than Baby Boomers and Seniors.
Looking ahead, the emerging and developing markets and middle-income consumers in these countries will take on a greater role. 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 contrast, emerging market consumers made up $12 trillion back in 2010.
Despite this growth story, U.S. investors are largely underallocated to the developing markets. Furthermore, investors who are allocated to the emerging markets have a large tilt toward 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 popularity traded emerging market ETFs, 30% of their underlying holdings are allocated to SOEs.