Emerging Markets Equities Done Right

Frontier markets are in the pale blue shade; emerging markets in the royal blue shade

I attended a CFA Society Tucson-sponsored investor call March 18th presented by Kevin T. Carter, Founder and Chief Operations Officer of EMQQ. To call it and emerging markets equity exchange traded fund would not do it justice. Kevin gave a great presentation and here are my takeaways.

Not all emerging markets equity funds are alike. He urged us to consider the presence of State Owned Enterprises in the fund. These, he asserted can have severe management shortcomings that can serve to diminish the efficiency of the company and might even make such a company vulnerable to corrupt raids by government officials. One very striking example of such an intrusion he gave was of President Lula de Silva of Brazil. He and his successor, Pres. Dilma Rousseff were charged in a corruption case involving the state-run oil company Petrobras. The business model of Petrobras presents a vulnerability to investors whereas a chief executive can intrude on operations and cause problems.

Kevin described business models that have more efficient management not dependent upon the favors of government officials. These typically rely upon private or institutional investors instead. He cited two of these: Berkshire Hathaway and the Yale Trust fund. Such as these will have to exert much due diligence before committing their investors’ funds to an enterprise. Due diligence includes an investigation of the corporate executives and the the finance of the company.

EMQQ ETF has 96 companies in their investment portfolio with a large concentration in China. Kevin told us that these have dissimilar investment weightings and these change as prices shift. The ETF is rebalanced semi-annually and the weightings will change as a result. I was pleased to see that the profile of a company considered for inclusion includes those with investment capital as little as $300M. This is in the Microcap asset class. In a previous post, I described this asset class and why I think it is a useful one to include in an investment portfolio. Those in this portfolio will be in non-US countries so they will carry even greater risk than US domestic ones.

Kevin showed us a performance chart that compared the EMQQ fund with the Morgan Stanley emerging markets index (MSCIEM). there was a surprising contrast. He said that this was due to EMQQ’s concentration on consumer products and service providers in the space. Further refining the company profile, these are internet and e-commerce companies.

The talk was about a “confluence” of three important socio-economic forces: first; demographics, especially population growth. The populations of countries considered “emerging” or “frontier” are growing at a much faster rate than that of the developed world. More people means larger and larger workforces producing more and more value. Faster growing populations that are hungry for the consumer goods enjoyed by the developed world means high consumer demand. Consumer demand signals sales of product and services. Those sales translate into corporate earnings; an important fundamental for share price. Production and sales are measured in economic growth statistics. China is forecast to have 7.6% growth in 2021; the USA, in a banner year and coming off 2020 with a growth LOSS of about 3.5% is forecast to have about 6.4% a net/net of about 3.5%. The second force of confluence is the smartphone. Kevin had a bar graph that showed nations and their per capita share of smartphones. The developed world, of course is very high while the developing one has a large but slowly declining gap. The smartphone leapfrogs over the personal computer by bringing access to the third force of confluence; the internet.

Internet connectedness brings a host of advancements to a population. The first is a very streamlined medium of exchange for goods and services. He showed a photo of a produce truck in China that had two QR code cards on a table. This shows that even for such informal retailing, consumers are buying without exchanging hard currency; by debiting the consumer’s online banking account and crediting the seller’s. E-finance commerce is multiples more efficient than currency commerce.

Not stated so clearly but in a comment I made, the proliferation of smartphones and the information people have at their fingertips make it harder for despots to ascend to power and restrain economic growth as they typically do; creating systems of cronyism. Internet access also provides access to the various social media platforms. Social media streamlines personal communication. This can be a huge advantage for business formation. Internet access generally increases access to information; to knowledge. The intangible benefit of this to a population cannot even be easily measured.

The confluence of factors influencing the developing world is a very exciting prospect for global socio-economic growth that can greatly enrich the savvy investor. Keep your eyes on EMQQ.