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.
Carter also highlighted the growing reliance on smartphones as a potential game changer in consumption patterns. Specifically, he pointed toward the rising trend of e-commerce and online shopping through smart devices in an increasingly digital age. The rise of e-commerce has also paralleled the increased adoption of smartphone usage or the declining costs of smartphone devices.
Carter argued that due to the still early adoption of these smart devices and early internet penetration among developing economies, there is still a lot of room to grow as more consumers gain access to online retailers. For example, while 70% of U.S. citizens have access to smartphones, Chinese smartphone users make up about 55% of its overall population and India’s smartphone users only make up 22% of its population. Furthermore, while 89% of the U.S. population has access to the internet, only 25% of India and 55% of China have access to the internet.
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 and further includes search engines, online retail, social networking, online video, e-payments, online gaming and online travel.
Financial advisors who are interested in learning more about the emerging markets can watch the webcast here on demand.