Emerging market exchange traded fund investors should look to ongoing trends like recent China delisting headlines, the evolving situation with Alibaba and Jack Ma, and how Gen-Z will drive the digital transformation in the developing economies for decades.
In the recent webcast, Investing in a Coming of Age: The Future Digital Generation in Emerging Markets, Kevin Carter, Founder and CIO, EMQQ, highlighted the opportunity in the emerging economies, notably their favorable demographics that continue to support consumption-based growth. He pointed out that 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.
Looking ahead, Carter argued that middle-income consumers will likely take on a greater role in the global economy, especially in the 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 back in 2010.
Investors have already turned to popular broad emerging market funds to track benchmarks like the MSCI Emerging Market Index, but those who hold EM funds 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.
Alternatively, Carter highlighted the potential opportunity of a targeted developing country internet and e-commerce play to capture a rising middle-income consumer class in the emerging markets, 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.
Carter pointed to ongoing trends like the growing reliance of smartphones as a major catalyst in changing consumption patterns. The rise of e-commerce has also paralleled the increased adoption of smartphone usage and the declining cost of the devices themselves.
Meanwhile, 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 61% of its overall population, and India’s smartphone users only constitute 32% of its population.
Additionally, the reliance on mobile devices in this digital age 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 the world continues to grapple with the Covid-19 pandemic, Carter argued that internet and e-commerce based business models are receiving a slight boost. The shift in day-to-day habits from lockdown measures to contain the pandemic has accelerated the adoption of certain platforms, such as distance learning, telemedicine, and food delivery, among others.
Lastly, Carter pointed out that EMQQ might be particularly well-positioned for today as it includes a heavy focus on a quickly recovering Chinese economy. China makes up 65% of EMQQ. 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 than before.
Financial advisors who are interested in learning more about e-commerce in the emerging markets can watch the webcast here on demand.