My first contact with electronic banking was way back in the 1970s when the Royal Bank of Canada launched Banquette and invited customers like my father to give it a try.
It was an early version of a debit card and dazzled with its high tech credentials. The cards arrived in the mail, we drove to a nearby RBC branch and inserted a card into a machine. Out came an envelope with three $10 bills. The card was returned in the mail a few days later reloaded with another $30.
These days I email money to my son in Australia. I use an online currency exchange service to swap Canadian dollars for Aussie at a better rate than the bank. The cash goes into his account in Sydney. I bank online like most Canadians and rarely visit a branch. I deposit cheques by taking a photo with my phone via an RBC mobile app.
While our advances have evolved over 40 years, they pale beside the speed and size of the internet-based commerce revolution in emerging markets. Large populations with a young demographic and growing incomes are taking advantage of the convergence of the internet and smartphones to fulfill their buying, selling and banking needs.
The numbers, as always, are enormous. India has 1.3 billion people with a median age of 27. (Canada’s median is 40.) India has about 560 million internet users with a penetration rate of 45%. The penetration rate is proportion of the total population that uses the internet. Canada’s is 88%.
India’s mobile phone subscriber base topped 1 billion five years ago. But only a little over half are internet-connected smartphones. The rest are basic devices used for phone calls and texts. So lots of potential there for internet-based transactions.
China’s ecommerce market is the most developed in the world and is four times as big as every other emerging market combined. China reached the milestone of 1 billion internet users this year. The World Economic Forum says China has 21% of all global internet users with India holding second place.
Many emerging markets are poorly served by things we take for granted. Access to basic services such as good roads and electricity, banking and bricks and mortar retail are limited. So they are using technology to leapfrog bottlenecks and get what they need online. While computers are an evolutionary device for us, in emerging markets for many a smartphone is the first computer. It has opened up a world of ecommerce to buy, sell, bank, move money, communicate, watch and learn.
For investors, this is essentially a consumer story. As incomes rise, consumers want more. More and better food, more and better clothing. Washers and dryers, appliances, entertainment, vacations. McKinsey and Co. in an oft-quoted piece of hyperbole, called the rise of the emerging market consumer the biggest growth opportunity in the history of capitalism.
“Investing in emerging markets is about two things,” says Kevin Carter, founder and chief investment officer of EMQQ ETF, a New York traded emerging market ecommerce fund.
“The first is that they’re 85% of world’s people. The second is that they’re almost 90% of world’s young people. And the thing that’s emerging is them.”
Mr. Carter’s fund is examined more closely below. It was launched seven years ago and has performed well. His long-time business partner is Burton Malkiel, the Princeton University economist. Mr. Malkiel’s book A Random Walk Down Wall Street made an early argument for passive index investing. Mr. Malkiel has served on the board of The Vanguard Group. His book has sold 1.5 million copies.
EMQQ ETF (NYSE: EMQQ) Recent US $52.62 All figures in US dollars.
Background: The Emerging Markets Internet & Ecommerce ETF offers exposure to the growth in internet and ecommerce activities in in Asia, Latin America, Africa, the Middle East and Eastern Europe.
It was launched in 2014, has $1.7 billion in assets and tracks a proprietary index of 118 companies including online retail, search engines, social networking, online video, e-payments, online gaming and online travel. The index is a modified market capitalization weighted index with the largest position capped at 8%. It is rebalanced semi-annually.
Performance: The fund is down 15.6% year-to-date as a series of Chinese regulatory moves have rattled emerging markets. It is slightly ahead of the category average decline as ranked by Morningstar Research.
In 2020, Morningstar ranked the fund 1st of 796 funds in its category. In 2019 it was ranked 2nd of 835 funds.
Holdings: The fund is heavily weighted towards China (61.9%) because China has the largest number of publicly listed players in the sector. After China is South Korea (6.6%), India (5.1%), Argentina (4.6%) and South Africa (4.6%).
The top 10 holdings account for 57% of the ETF and are also skewed to China. The biggest holdings are internet and ecommerce giants Alibaba (8.43%) and Tencent (7.38%). Third is Pinduoduo, (6.46%), the largest agriculture-focused technology platform in China. It connects farmers and distributors with consumers directly. Meituan (6.39%) is a Chinese group-discount website, similar to Groupon, selling merchant vouchers for deals. Argentina’s Mercadolibre (5.63%) is Latin America’s dominant platform for online sales, online advertising and group discount buying.
It is of interest to Canadians that the Canada Pension Plan Investment Board (CPP IB) which manages the CPP on our behalf also holds four of the fund’s top five companies (Alibaba, Tencent, Meituan and Mercadolibre).
Discussion: Chinese regulatory shocks have upended emerging markets. It started with the Ant Group IPO which was pulled at the last minute in November. (Ant is an affiliate of Alibaba.) Alibaba later paid a record US$2.9 billion fine in China for anti-competitive practices. In July days after the debut of ride sharing giant DIDI Global Group in New York (NYSE: DIDI) Chinese regulators removed the company’s app from downloads because of security issues.
Most recently China has banned for-profit tutoring to rein in the private education industry. Overnight it has made several public companies almost worthless.
The moves collectively knocked a third of the value from EMQQ at its worst. Mr. Carter says environment investors have panicked in a highly politicized, seeing the moves as the Communist Party manipulating markets. He sees it as regulators maturing and doing their job.
“[Regulators] pulled the emergency brake, tightened up the rules and have pushed the restart button. It makes me even more bullish on the story.”
Mr. Carter believes the emerging market ecommerce sector will continue to be among the best of global performers. He notes that in the 10 years ended December 2019, the average annual ecommerce revenue growth in emerging markets was 38.5%.
“Investors with a three or five-year time frame will do very well, but not without volatility,” he warns. “We’ve had many 30% declines before and we’re having one right now and we will have more in the future.”