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A fund that is reshaping how we think about emerging markets


Kevin Carter, founder of the Emerging Markets Internet & Ecommerce Ucits ETF (EMQQ), sets out why he believes a focus on internet and e-commerce is the way to capture mega-trend growth in emerging markets.

Anyone who has travelled to China recently will have been struck by the increasing dominance of the cashless society. In Beijing and other big cities, even buying fruit and vegetables from a stall holder in the street means paying with a mobile phone and the QR codes of Alipay or WeChat Pay. Now that cash is widely declined in cities for even the smallest purchases, the Chinese have leapfrogged the credit and debit card age and moved straight to mobile payments.

Outside the cities, cash continues to be used, a reflection of the split in the Chinese economy between legacy industries (heavy industry, manufacturing and retail) and the new internet-based ecommerce sector.

From an investor’s point of view, legacy industry companies are beset by corruption, inefficiency and low accounting standards, while their growth and profitability are often low. One example is the Brazilian oil company Petrobras, which has been the focus of a string of corruption scandals that has seen the jailing of the country’s past three presidents.

Risk and reward

Investors making their risk/reward calculations may instead prefer to look at modern, professionally managed technology companies, some of which have seen spectacular growth, like Alibaba and Tencent in China. Nudging India towards a cashless society is Paytm, an e-commerce payment system and financial technology company, launched with backing from Alibaba and Warren Buffett’s Berkshire Hathaway. Nigeria-based Jumia Technologies, dubbed the ‘Amazon of Africa’, went public this year on the New York Stock Exchange, with the big ambition to “build a digital Africa”.

The reason for their success is the well-known mega-trend developing throughout the emerging markets: the rise of discretionary spending driven by billions of people entering the middle classes, wanting to spend their income on clothes, cars, household goods and entertainment.

McKinsey & Co have estimated that by 2025, annual consumption in emerging markets will reach $30trn, what they describe as “the biggest growth opportunity in the history of capitalism”. It is the internet and e-commerce serving the needs of billions of people that makes that unprecedented growth possible, and which provides a real investment opportunity.

Light bulb moment

Kevin Carter launched the EMQQ Emerging Markets Internet & Ecommerce ETF in December 2014 (a UCITS version launched on the HANetf platform in London in October 2018), with the aim of picking fast-growing Chinese internet and e-commerce stocks that were taking market share from traditional consumer stocks. Two of the fund’s original stocks that illustrate his thinking are Wuba, China’s largest online marketplace for classified adverts (the ‘Craigslist of China’), and Mercado Libre, an Argentinian company dedicated to online shopping and e-commerce throughout South America.

For Carter, having Mercado Libre in his fund was a no-brainer. As well as being a good business idea, the company also addressed many of the long-standing problems of investing in emerging markets, primarily corruption and poor accounting standards. Mercado Libre was founded by a former Stanford University student, whose business strategy was informed by the latest management and accounting theories; the board had Nobel Prize winning economist Michael Spence; financial backing came from a string of blue chip investors, including eBay, JP Morgan Partners and Goldman Sachs; and, as Mercado Libre was listed on the NASDAQ, it met all the US accounting and listing standards.

Of the 67 public companies on the EMQQ index, a number make their own significant investments in private companies, leveraging their local and regional knowledge to tap growth well below the radar of the major emerging market indices. Alibaba, from its humble beginnings in the domestic e-commerce market, has branched out into a number of sectors via launches, acquisitions and joint ventures. One example is Didi, the ‘Uber of China’, a joint venture created by Alibaba and Tencent to keep out Uber from China.

Rethinking parameters

But their most promising development is in financial services. With the Alipay payment network rebranded as Ant Financial in 2014, the way was open to offer its huge user base a suite of financial services through its digital wallet, including credit, banking, insurance and wealth management: a measure of its success is that, today, Ant Financial has the biggest money-market fund in the world, the Tianhong Yu’e Bao fund, serving the needs of some 590 million people, a third of China’s population.

Investors have rightly been sceptical of emerging markets, as their returns over the past decade have disappointed. One reason, Carter says, is that the traditional emerging market indexes did not include internet companies.

Alibaba, when it went public in September 2014 with a valuation of $25bn (now worth more than $430bn) was not on the index. Nor was $33bn Baidu, ‘the Google of China’, which provides numerous community-based apps and services but is best known for its search engine and mapping services. The Alibaba IPO, the biggest on record, forced the index companies to rethink their indexes.

Also by James Norris:

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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