The Digital Dilemma: Investing in the Age of the Internet

As investors consider the growing influence of a newly-digitized generation, many are asking themselves: which companies are positioned at the front of these trends?

In the recent webcast, A Digital Revolution in Emerging Markets: Opportunities in China’s Tech Sell-off, Kevin Carter, Founder and CIO, The Emerging Markets Internet & Ecommerce ETF (EMQQ), underscored the opportunity in emerging economies, like their favorable demographics that continue to support consumption-based growth and the fact that 85% of the global population resides in developing economies. 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.

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 utilized popular broad emerging market funds to track benchmarks like the MSCI Emerging Market Index, but those EM funds are 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.

Carter argued that investors should focus on the growth of consumers or increased consumption trends in the developing economies. Specifically, ongoing trends like the growing reliance of smartphones is a major catalyst in changing global consumption patterns. The rise of e-commerce has also paralleled the increased adoption of smartphone usage and the declining cost of the devices themselves.

Additionally, 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 63% of its overall population, and India’s smartphone users only constitute 32% of its population.

The emerging markets are also enjoying a booming pipeline of new initial public offerings that include a range of new internet names to tap into the shifting consumer trends toward online shopping. Looking ahead, Carter believeds that emerging market growth will be supported by the internet sector, especially given the shifting demand among emerging market consumer for smartphones and internet via mobile broadband. Consequently, EM e-commerce models are “leapfrogging” traditional models and are growing five times as fast as consumption.

As a better alternative to traditional emerging market funds, Carter highlighted a focused strategy, the Emerging Markets Internet & Ecommerce ETF (NYSEArca: EMQQ), which includes access to EM companies related to online retailers and 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.

However, the segment has been recently dragged down by uncertainty surrounding China’s regulatory crackdown on its big technology and internet names. Carter warned that sentiment around China is extremely negative and will continue to pose real and headline risks, but may help valuations.

Financial advisors who are interested in learning more about the revolution in the emerging markets can watch the webcast here on demand.