As billions of people in the emerging markets move beyond traditional consumption patterns, investors can turn to exchange traded fund strategies to tap into this massive consumer wave and the growing digital revolution in developing economies.
In the recent webcast, Emerging Markets 3.0: Capturing the Growth with a Thematic Approach, Kevin Carter, Founder and CIO, The Emerging Markets Internet & Ecommerce ETF (EMQQ), highlighted the opportunity in emerging economies, such as their favorable demographics that continue to support consumption-based growth. He pointed out 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 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.
As a better alternative to focus on the shifting trends in emerging market consumption, Carter pointed to assets like 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.
Carter argued that 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 61% of its overall population, and India’s smartphone users only constitute 32% of its population.
As the world continues to grapple with the Covid-19 pandemic, Carter argued that internet- and e-commerce-based business models have received a permanent boost. The shift in day-to-day habits from lockdown measures to contain the pandemic has accelerated the adoption of certain platforms, such as e-commerce, distance learning, telemedicine, and food delivery, among others.
Lastly, Carter believes that EMQQ might be particularly well-positioned for the markets ahead, as it includes a focus on a quickly recovering Chinese economy, which is expected to expand by 8% in 2021. 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 the emerging markets can watch the webcast here on demand.