With the growing influence of a rising middle-income consumer base in developing countries and their preference for online shopping via digital devices, investors can capitalize on the rapidly expanding e-commerce segment through a targeted exchange traded fund.
On the recent webcast, Where the Growth is in Emerging Markets: Alibaba, MercadoLibre & Tencent are Transforming the World, Kevin Carter, Founder and CEO of EMQQ, highlighted the favorable demographics that could continue to support consumption-based growth in the emerging markets, with 85% of the global population residing in developing economies and also accounting for about 50% of global GDP. About 90% of the world population is also under the age of 30, and these younger consumers will buy differently than the older generation. Millennials and Gen Xers spend 50% more time shopping online than Baby Boomers and Seniors.
Looking ahead, middle-income consumers will take on a greater role in the emerging and developing economies. 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 accounted for $12 trillion in world consumption back in 2010.
Despite this growth story, U.S. investors are largely underallocated to the developing markets. Furthermore, investors who have exposure to the emerging markets largely 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 popularly traded emerging market ETFs, 30% of their underlying holdings are allocated to SOEs.
Carter also pointed to the growing reliance on smartphones as a major catalyst in changing consumption patterns, especially in the developing countries. 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 adoption of smart devices and internet penetration among developing economies remain in the early phases, so there is still a lot of room to grow as more consumers gain access to online retailers. For example, while 77% 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 28% of its population.
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.
Investors can also look to this emerging market consumer segment as a way to take advantage of concerns about the ongoing trade war and recent volatility. Carter argued that the fundamental impact to EMQQ Index, the underlying index for the ETF, should be minimal.
“Trade wars are about steel, cars, pigs and sorghum while EMQQ is about people in China, India, Africa etc. accessing information, buying food, hailing rides, etc. on their smartphones,” Carter said.
Financial advisors who are interested in learning more about emerging market growth opportunities can watch the webcast here on demand.