Why Investors Should Be Looking at Emerging Markets ETF Opportunities

Looking at the positive trends that will support emerging economies, investors can leverage a focused exchange-traded emerging markets fund strategy to capitalize on these overseas opportunities.

In the recent webcast Burton Malkiel on Emerging Markets: The Next Decade of Global Growth and How to Use Itdr. Burton G. Malkiel, EMQQ Global Advisor and FMQQ Index Committee Member, Princeton Economist, and author of A random walk through Wall Streetsaid he is excited about the outlook for emerging and frontier markets, focusing on the: Emerging Markets Internet & Ecommerce ETF (NYSEArca: EMQQ) and the Next Frontier Internet & Ecommerce ETF (FMQQ) access these emerging economies.

In particular, Malkiel argued that future paths are likely to favor strategies such as EMQQ and FMQQ. He underlined that valuations in the US are now relatively high. Relative growth will be much higher in emerging markets, as many economies are still in their growth spurt phase. Meanwhile, currencies now favor EM investment. Considering these positive supportive factors, Malkiel argued that EMQQ and FMQQ portfolios will help investors focus on the areas where growth is most assured.

Looking ahead, Malkiel noted that the International Monetary Fund has forecast robust growth in developing countries for 2023, with 6.1% growth for India, 5.2% for the least developing countries, 5.1% for other Asian economies and 4.6 % for China. By comparison, the United States economy is expected to grow by 1.0% in the coming year.

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The developing countries also have favorable population demographics. The least developed countries are estimated to see an average population growth of 2.23% from 2020 to 2025, compared to a growth of 0.56% for the US population and a growth of -0.05% for the Eurozone. In addition, more developed countries have rapidly aging populations: 28% of Japan’s population is over 65, 21% in the Eurozone and 17% in the United States, compared to just 4% in the least developed countries.

Valuations in US markets are high, suggesting that investors may find more attractive opportunities by diversifying beyond domestic equities. The CAPE ratio of the S&P 500 Index was trading around 28x, compared to the historical average of 17x. Malkiel noted that the Nasdaq-100 is trading at a price-to-earnings ratio of 21.0x, compared to EMQQ’s price-to-earnings ratio of 14.7x.

EMQQ’s portfolio also houses several strong companies with healthy balance sheets. Approximately 84% of EMQQ’s underlying businesses are net cash. The underlying benchmark components of the ETF show total equity debt of 37%, compared to 112% for S&P 500 components.

Malkiel also claimed that emerging economies could soon enjoy favorable currency trends. After the US dollar strengthened as a result of the aggressive monetary policy outlook from the Federal Reserve, with the US Dollar Index rising 20%, the greenback will undergo a mean reversion. Economic models indicate that the USD is overvalued, so a weakening dollar or stronger emerging currencies may also help support emerging market returns.

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Kevin T. Carter, founder and CIO of EMQQ Global, also underlined the favorable demographics of developing countries that continue to support consumption-based growth, and the fact that 85% of the world’s population lives in developing countries. Emerging markets and frontier markets are also home to some of the youngest populations, with about 8.8 times as many people under 30 as in developed economies.

By bolstering the continued growth prospects for the emerging consumer class, middle-income consumers could play a more important role in the future global economy, especially in emerging countries where the younger demographic is thriving, Carter added. According to forecasts from McKinsey & Co. 4.2 billion people are expected to make up the consumer class by 2025. Emerging markets could account for $30 trillion in consumption, while developed markets could account for $34 trillion. By comparison, emerging market consumers generated just $12 trillion in world consumption in 2010.

Investors have used popular broad-based emerging markets funds to track commonly used benchmarks, such as the MSCI Emerging Market Index. However, these traditional EM funds are too exposed to state owned and controlled government-owned companies. Carter warned that these so-called state-owned companies are large and inefficient, have poor corporate governance and can exhibit widespread corruption. Of the largest or most traded emerging markets ETFs, 30% of underlying positions are allocated to state-owned companies.

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Looking ahead, Carter argued that investors should consider consumer growth or increasing consumption trends in emerging economies. In particular, persistent trends, such as growing reliance on smartphones, are an important catalyst in changing global consumption patterns. The rise of e-commerce is also accompanied by the increased adoption of smartphone use and the falling costs of the devices themselves.

Carter added that EMQQ has primarily been a China story as China makes up more than 50% of EMQQ’s underlying portfolio, which comes as no surprise given that e-commerce sales in China are four times greater. than in all other emerging countries combined. However, this does not mean that investors should ignore the next frontier of consumer markets. Like many other frontier regions, emerging economies are seeing a slew of new e-commerce or internet retail businesses come online.

Carter also noted that the next frontier population is 4.0 times larger than China, providing an even larger consumer base to support a growing internet and e-commerce industry. In addition, the next frontier has seen e-commerce penetration of just 5% or about a fifth of the Chinese market.

Financial advisors interested in learning more about emerging economies can: watch the webcast here on request.


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