Emerging and Frontier Markets Monthly Report | July

Emerging and Frontier Markets Monthly Report: Key Takeaways

The EMQQ Index remained in positive territory in the month of June, with a return of 3.35%. Year to date the Index is down -24.7% although green shoots are emerging that the worst has been priced in.

While headlines around COVID lockdowns continue to occasionally flare up in China, there are growing signs that the government is willing to increase stimulus measures to help support the slowing economy this year. Reports have emerged that China’s Ministry of Finance is considering allowing local governments to raise upwards of $220 billion to reinvest in their local economies.[1] Considering that China’s inflation outlook remains far more sanguine than other large economies globally, it still has the firepower to step up the ante on stimulus while others are pulling back.

Meanwhile China tech stocks continue to exhibit renewed signs of life. Large institutional investors ranging from UBS to JP Morgan continue to ramp up their bullish bets on the space after a clearer and more defined regulatory framework suggests that the worst maybe indeed be over.[2] This thesis is further fuelled by the fact that Chinese regulators recently accepted Ant Group’s bid to convert to a financial holding company.[3] This suggests Ant is poised to emerge from a regulatory crackdown that first surfaced in late 2020. Ant Financial has in many ways become the poster child of regulatory scrutiny in China and these new steps are a welcomed sign that we are returning to normalization after a difficult year and half of changes. As we’ve always said, tech regulation is not and will not be unique to China. It is perhaps the first country to tackle these issues in a comprehensive manner, but it won’t be the last.

The EM tech stocks outside of China (the FMQQ portion of the portfolio), continue to ebb and flow around rate hike concerns in the US. Fundamentally, the story hasn’t changed much throughout the course of the year. These companies are still on pace to grow their sales 25%+ this year and earnings have thus far been positive through the first quarter of 2022. Valuations remain subdued as discussed below.

Finally, the EMQQ Index completed its first semi-annual rebalance of year at the end of June. India continues to grow in the prominence in the Index considering its massive population, low penetration levels and high growth potential. Further details are provided below.

Please note that all performance figures are showing net data. Past performance is not indicative of future performance.

June 2022 Rebalance

With this latest rebalance, the EMQQ Index has increased to 135 constituents, adding nineteen companies, and dropping fourteen due to the Index rules on market capitalization, liquidity, and trading volume.

While the largest addition was a Chinese internet firm, most of the new adds came from outside China, with roughly 90% of the new entrants coming from markets such as Brazil, India, Indonesia, and South Korea.

The top three companies added during the rebalancing were Kanzhun Ltd (China), Bank Jago Tbk (Indonesia) and PB Fintech (India). Their details are outlined below:

Kanzhun: Is the largest new addition to the Index and now its 23rd largest holding. Founded in 2014, Kanzhun is the leading online recruitment platform in China. It connects job seekers and enterprises through a mobile app. US-based investors may be more comfortable thinking of it as the Indeed.com of China. The company maintains over 100 million users.

Bank Jago Tbk: Is a leading digital bank based in Indonesia. Like Nubank in Brazil (the world’s largest digital bank and another EMQQ Index member), Bank Jago offers savings accounts, loans, money transfer via digital/ mobile channels. In 2020 another EMQQ Global company, the GoTo Group, became a major shareholder in the company to help facilitate its digital transformation. GoTo is a leading tech company in Indonesia that offers everything from e-commerce and fintech to ride hailing.

PB Fintech (“PolicyBazaar”): Is India’s largest online platform for insurance and lending products. Founded in 2008 the online financial services platform has become a go app for comparing policies and connecting users to third-party insurance and lending offerings.

On a country level, India continues to grow in prominence in the index. Ten of the nineteen new additions came from companies originating from the South Asian country of 1.4 billion people. Chief among those include PB Fintech, mentioned above, Indian Energy Exchange, an online energy brokerage and Truecaller AB, an online Caller ID app with over 300 million users. This trend is likely to continue. The Indian internet opportunity in many ways mirrors China 10 years ago and the US over two decades ago. We often refer to EM countries like India and others outside China to be part of a “digital third wave.” These markets are just reaching critical mass in terms of internet users and smartphone penetration, which will provide strong tailwinds for their growth over the next decade.

Source of all data: EMQQ Global.

Macro Outlook

At the risk of sounding redundant to monthly readers of our newsletter, valuations across the board in EMQQ remain attractive. While China tech stocks have revived over recent months, they still exhibit large valuation discrepancies to their US peers despite their long-term growth potential. While regulatory pressures and COVID lockdowns will lead to slower growth this year, the outlook Is still nonetheless robust.

The non-China portion of the portfolio has even more exciting growth prospects than their Chinese counterparts considering they are far earlier in their development, but short-term concerns around interest rate hikes have led to both peak fear and substantially lower valuations.

Making short term market predictions is rather difficult in this environment but the EMQQ story remains fundamentally unchanged. 

 Emerging Markets ETF and Index Performance (As of 30.06.2022)

 Frontier Markets ETF and Index Performance (As of 30.06.2022)

Please note that all performance figures are showing net data. Source: Bloomberg / HANetf. Data as of 30/06/2022. Performance before inception is based on back tested data. Back testing is the process of evaluating an investment strategy by applying it to historical data to simulate what the performance of such strategy would have been. Back tested data does not represent actual performance and should not be interpreted as an indication of actual or future performance. Past performance for the index is in USD. Past performance is not an indicator for future results and should not be the sole factor of consideration when selecting a product. Investors should read the prospectus of the Issuer (“Prospectus”) before investing and should refer to the section of the Prospectus entitled ‘Risk Factors’ for further details of risks associated with an investment in this product.      

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