While the FMQQ index declined by 17.6% in January against a backdrop of a larger global tech sell-off and expectations of higher rates in the U.S., the pullback has already helped reset valuations to more comfortable levels across the Next Frontier Internet & Ecommerce ETF (FMQQ) portfolio.
One example where this is being seen is with MercadoLibre Inc. (MELI), Latin America’s leading e-commerce company and one of FMQQ’s top holdings. After peaking in early 2021, the price to sales ratio of the Buenos Aires-based firm has dropped to multi-year lows. And yet, the company’s prospects remain unchanged.
Latin America’s e-commerce penetration is 5%, versus 25% for China. That opportunity to accelerate from a low base explains why three of the top 10 markets for e-commerce growth this year are expected to be in Latin America. This all comes while MercadoLibre remains profitable.
“While it’s difficult to call a bottom, valuations have begun to pull in dramatically while the long-term growth prospects of the underlying companies have not altered,” writes Akeem Bailey, director of research at EMQQ, in a monthly outlook paper.
Bailey explained in an email that this means that with companies like MercadoLibre, “You’re getting a long-term growth compounder at a discount. Multiples are starting to compress to reasonable levels when you consider there’s still a long-run way for growth in the EM e-commerce space, especially in Latin America.”
The FMQQ Index is comprised of 60 names. As of February 3, its top holdings are Mumbai-based conglomerate Reliance Industries Ltd. (at 10.65%), Buenos Aires-based e-commerce firm MercadoLibre Inc. (at 7.97%), and South Korean internet conglomerate NAVER Corp. (at 6.73%).
All companies in the FMQQ Index are drawn from the three major regions of Asia, Latin America, and EMEA (Europe, Middle East, and Africa). FMQQ uses the same investment strategy as the Emerging Markets Internet & Ecommerce ETF (EMQQ) but does not contain China as one of the countries the fund invests in.
FMQQ seeks to provide investment results that, before fees and expenses, generally correspond to the price and yield performance of the Next Frontier Internet and Ecommerce Index (FMQQetf.com). Securities must meet a minimum of a $300 million market cap and pass a liquidity screen that requires $1 million average daily turnover.
FMQQ has an expense ratio of 0.86%.
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