They don’t call them “emerging” markets for nothing.
Overhangs to the emerging markets bull case — most notably the ongoing U.S.-China trade dispute and the increasingly violent protests in Hong Kong — aren’t swaying EMQQ founder Kevin Carter from his post as head of the China-heavy exchange-traded fund.
In fact, the cacophony of China worries actually gives the ETF creator some “comfort” in knowing things couldn’t get much worse, he told CNBC’s “ETF Edge” on Monday.
“We had large declines coming into this year — about 30% last year — but the fundamentals were great,” Carter said. “I actually take comfort in the fact that we have a pretty significant trade war. We have, literally, blood in the streets of Hong Kong and now, at least in the last several weeks, even LeBron James has been dragged into the conflict. So, I think that it’s hard to make up a scenario where the backdrop would be even worse than this.”
Amid all the noise, EMQQ, known both by its ticker and as The Emerging Markets Internet & Ecommerce ETF, is up nearly 26% year to date. The fund counts the stocks of Chinese giants Pinduoduo, Alibaba and Tencent among its top holdings and costs 86 basis points to own.
“China’s economy has been softening, in terms of GDP growth slowing, for 15 years. The consumer growth remains quite strong, but … sentiment has been the problem,” Carter said. “The fundamentals of this story have been incredibly sound.”
Those fundamentals have been key drivers for EMQQ’s thesis in the years since its 2014 launch. The fund invests only in companies that derive over half of their revenues from internet- or e-commerce-based businesses that are located in “emerging or frontier markets” and have a minimum market cap of $300 million, according to EMQQ’s website.
“The idea of EMQQ is that 85% of the world population lives in emerging markets and those economies are growing faster than ours, and what’s emerging are the people, the consumers,” Carter said. “Just as consumption has changed here with the smartphone, it’s changing in the developing world — in China, in India, in Africa — but it’s changing and leapfrogging what we think of [as] traditional consumption.”
This new set of consumers is largely unbanked or underbanked, meaning they may not have had traditional bank accounts in the way many U.S. consumers do, Carter said. They’ve also probably never had a computer before the smartphone or frequented physical retail stores, making them a unique target audience for e-commerce companies.
“This giant part of the world’s population are becoming consumers with a supercomputer in their pocket as so-called digital natives,” Carter said. “[And] it’s not just China. This phenomenon is spreading. It’s spreading to India, to Africa. So, we own Mercadolibre, which dominates from Mexico to the tip of South America. We own Jumia, which went public here at the NYSE earlier this year, which is the African leader in e-commerce.”
Those digital natives are helping drive their own growth story, and EMQQ — which invests solely in internet and e-commerce companies, steering clear of the smartphone makers themselves — is catching the windfall, the founder said.
“This is a secular trend,” he said. “Eighty-five percent of the world’s people are becoming consumers. They never had a computer. They never will have a computer the way we think of them. It’s the smartphone [that] will be the first and only computer for most of the world, and they’re getting internet access as well. So, it’s sort of a turbocharged growth story as this wave of consumer leapfrogs, uses the phone for their wallet [and] skip[s] the traditional bank system. And … this isn’t the traditional emerging markets cycle. This is a combination of three mega-trends all happening at the same time.”
EMQQ was less than 1% higher in early Tuesday trading. The ETF is up nearly 30% since its November 2014 launch.