Why Investors Should Look at Emerging Markets ETF Opportunities

As we examine the positive trends that will support developing economies, investors can use an emerging market index fund strategy to seize these opportunities overseas.

During the recent webcast, Burton Malkiel in Emerging Markets: The Next Decade of Global Growth and How to Seize ItDr. Burton G. Malkiel, EMQQ Global Advisor and FMQQ Index Committee Member, Princeton Economist and Author of A random walk down Wall Streetexpressed excitement about the outlook for emerging and frontier markets, noting the Emerging Markets Internet & E-Commerce ETFs (NYSEArca: EMQQ) and the Next Frontier Internet and E-Commerce ETF (FMQQ) to access these developing economies.

Specifically, Malkiel argued that future pathways are likely to favor strategies such as EMQQ and FMQQ. He pointed to the fact that US valuations 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 emerging market investments. As we examine these positive supporting factors, Malkiel argued that the EMQQ and FMQQ portfolios will help investors focus in particular on areas where growth is most certain.

Looking ahead, Malkiel noted that the International Monetary Fund predicts robust growth in the developing world in 2023, with growth of 6.1% for India, 5.2% for least developed countries, 5 .1% for the other Asian economies and 4.6% for China. In comparison, the US economy is expected to grow by 1.0% over the coming year.

Developing countries also welcome favorable demographics. It is estimated that the least developed countries will experience an average population growth of 2.23% from 2020 to 2025, compared to a growth rate of 0.56% for the American population and a rate of -0.05% for the euro zone . In addition, more developed countries have a rapidly aging population, with 28% of Japan’s population over the age of 65, 21% in the Eurozone and 17% in the United States, compared to only 4% in the least developed countries. less advanced.

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

EMQQ’s portfolio is also host to several strong companies with healthy balance sheets. Approximately 84% of EMQQ’s underlying companies are net cash. The ETF’s underlying benchmark constituents have a total debt to equity ratio of 37%, compared to 112% for the S&P 500 constituents.

Malkiel also argued that emerging economies could soon benefit from favorable currency trends. After the US Dollar strengthened amid the Federal Reserve’s hawkish monetary policy outlook, with the US Dollar Index up 20%, the greenback is expected to experience a mean reversion. Economic models indicate that the dollar is overvalued, so a weaker dollar or stronger emerging currencies could also help support returns in developing markets.

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

By bolstering the ongoing growth prospects for the emerging consumer class, middle-income consumers could play a bigger role in the coming global economy, especially in emerging countries where young demographics are thriving, Carter added. According to McKinsey & Co. projections, 4.2 billion people are expected to make up the consumer class by 2025. Emerging markets could account for $30 trillion in consumption, with developed markets accounting for $34 trillion. By comparison, consumers in emerging markets only generated $12 trillion in global consumption in 2010.

Investors used broad popular emerging market funds to track widely observed benchmarks like the MSCI Emerging Market Index. However, these traditional emerging funds are overexposed to government-owned and controlled public companies. Carter warned that these so-called public companies are large, inefficient, have poor corporate governance and may show widespread corruption. Among the largest or most traded emerging market ETFs, 30% of the underlying holdings are allocated to public companies.

Looking ahead, Carter argued, investors should consider consumer growth or increased consumer trends in developing economies. Specifically, current trends such as the growing addiction to smartphones are important catalysts for changing global consumption patterns. The rise of e-commerce has also been accompanied by the increased adoption of smartphone usage and the falling cost of the devices themselves.

Carter added that EMQQ was primarily a China story, as China represents over 50% of EMQQ’s underlying portfolio, which is no surprise since e-commerce sales in China are four times greater than those of all other emerging market countries combined. However, that doesn’t mean investors should ignore the next frontier of consumer markets. Like many frontiers, developing economies are seeing a slew of new e-commerce or internet retail companies coming online.

Carter also noted that the population of the Next Frontier is 4.0 times larger than China, which provides an even larger consumer base to support a growing Internet and e-commerce industry. Furthermore, the next frontier has only seen e-commerce penetration of 5%, or about one-fifth of the Chinese market.

Financial advisors interested in learning more about developing economies can watch the webcast here on demand.%> Learn more at ETFtrends.com.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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