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Where To Be In The Emerging Markets Renaissance

August 31, 2020 1:00 pm
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Where To Be In The Emerging Markets Renaissance

Emerging markets equities aren't awful this year, but with the MSCI Emerging Markets Index up just 1.52% year to date, the asset class isn't anything to write home about, unless investors know where to look.

What Happened: When it comes to developing world equity markets, knowing where to look usually includes a focus on e-commerce and online retail and there are some exchange-traded funds that oblige. Moreover, these ETFs are handily outperforming their more basic emerging markets counterparts.

Take the case of the KraneShares FTSE Emerging Markets Consumer Technology Index ETF (NYSE:KEMQ), which is higher by nearly 23% this year.

Why It's Important: The $143.55 million KEMQ, which is closing in on its third birthday, tracks the Solactive Emerging Markets Consumer Technology Index. That benchmark includes ecommerce, online retail, fintech and Internet software companies from 26 developing economies, giving it a growthier feel than traditional emerging markets strategies.

“Emerging Markets Consumer Technology refers to the online companies that facilitate the everyday activities of the middle class in Emerging Markets, one of the fastest-growing consumer groups on the planet,” said KraneShares in a recent note. “According to a study from the Brookings Institution, middle class consumption could reach 50% of total global consumption by the year 2030, more than doubling from 2015.”

Like comparable U.S.-focused ETFs, KEMQ is heavily allocated to the communication services and consumer discretionary sectors as those groups combine for 84.60% of the ETF's weight. In other words, KEMQ is 100% a growth ETF while the MSCI Emerging Markets Index is a 60/40 growth/value split.

That's a crucial distinction because the growth/value gap investors are seeing in the U.S. is extending to other geographies, including emerging markets.

What's Next: Adding to the KEMQ thesis is that the more than 10 countries represented in the fund aren't vulnerable to the same potential headwinds as are U.S. equities.

“Potential headwinds for the US market include the scaling back of Fed stimulus programs, increasing pressure on the US dollar, valuations coming back to earth, and the potential for new shutdowns due to rising Covid-19 case numbers,” notes KraneShares. “Needless to say, increasing global diversification in one’s portfolio may be wise. We believe Emerging Markets Consumer Technology presents a ripe option for global diversification at this critical juncture.”

Moreover, there's a discount available with KEMQ. That's not the say the fund's components are inexpensive, but those stocks are cheaper than equivalent U.S. e-commerce and internet retail names.


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