Emerging Markets Monthly Report | September

Key takeaways from the emerging markets ETF monthly report

• August was marked by a flurry of second quarter results from most of our top holdings. While headlines around regulatory pressures in China continue to ebb and flow in the short term, our companies continue to grow at resilient levels. We briefly highlight some of the key constituents of our Emerging Markets ETF below:   
• Alibaba’s revenue grew 34%, led by its e-commerce operations in both China and abroad as its global active user count eclipses 1.1 billion. [1]
• Tencent sales edged up 20% with solid growth across all key segments, including gaming (+12%), Online Advertising (+23%) and Fintech/ Business Services (40%). [2]
• Our third and fourth largest Chinese holdings, Pinduoduo and Meituan, continued to post strong results as their sales in the second quarter surged 89% and 77%, respectively. Both continue to exhibit strong user growth, particularly in lower-tier cities in China… another major source of growth for years to come. [3]
• In Latin America, Mercadolibre continues to fire on cylinders after posting 102% revenue growth on a FX neutral basis. [4]
• SEA Limited, one of the leading Super Apps of Southeast Asia, saw its sales improve 158% while its gross profits tripled. [5]
• IPO Engine Humming: In Korea, two new internet companies completed their IPOs, including gaming-giant Krafton, and Kakaobank, the country’s largest interest-only bank. In India, the Doordash of India, Zomato, completed its public listing. 

Performance Review

The Emerging Markets and Ecommerce UCITS ETF (EMQQ) is flat on a trailing 1-year basis as of August 2021. While recent performance has stalled after a very strong 2020, the ETF continues to be one of the better performers since Inception. See chart below. 

August saw performance return to positive territory with a gain of roughly 1.3%. The leading contributors to EMQQ’s performance CY are Kakao Corp and Sea Limited, posting gains over 86% and 69% respectively. While Sea Ltd was buoyed by another round of triple-digit sales growth last quarter, Kakao (the leading Korean Super App) continues to monetize its impressive ecosystem of internet businesses much like Tencent in China. KakaoBank, the internet-banking subsidiary of Kakao, publicly listed in August, and KakoPay, a leading fintech operator, also expects to float its shares in October. 

The two largest detractors for the first eight months of 2021 are Pinduoduo and Alibaba, dropping over 43% and 28% respectively. Both names appear to be weighed down more by negative headlines than their actual results. As stated above, Pinduoduo sales grew 89% in the second quarter while Alibaba climbed 34%. While Chinese internet companies must increasingly adjust to a new wave of regulations, on the ground their businesses continue to exhibit resilient growth as the structural themes of increasing digitalisation continue to play. (Source: Company Financials, Bloomberg)

Please note that all performance figures are showing net data. 

For illustrative purposes only. As of 31.08.2021

EMQQ Performance (As of 30.08.2021)

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. Source: Bloomberg / HANetf. Data as of 31/8/2021. Please note that all performance figures are showing net data.

Industry News

First Quarter Earnings: Below is a visual representation of how some of our top holdings fared in Q2 from a revenue growth perspective. While the growth leaders this quarter originated from outside of China (Sea Ltd and Mercadolibre), our Chinese companies continue to post healthy growth numbers, which is in stark contrast to the barrage of negative headlines proliferated through the course of the summer. While Chinese internet giants will have to adjust to new regulatory norms, consumers still rely heavily on their products/ services, and we see that in the resilient growth displayed through the year. 

Source: Public Company Financials.  For illustrative purposes only

South Korean IPOs: The Korean internet IPO pipeline continues to also heat up, increasing the diversity of EM tech companies available to global equity investors. Earlier this year, Coupang, the country’s largest e-commerce platform completed its IPO in the US. In August, two sizeable Korean firms joined those ranks. The first is Krafton, the mobile-gaming company whose flagship title, PUGB, remains one of the most popular franchises globally. Kakaobank is a subsidiary of a current EMQQ holding (Kakao Corp) and has built a strong niche as South Korea’s largest internet-only bank. 

Indian Unicorns and IPOs: Our last rebalance in June saw our allocation to India surge as more private Indian start-ups float their shares on public markets. This trend is likely to continue. In August, Zomato, the Indian equivalent of Doordash, completed its IPO offering. A series of heavyweights such as Paytm, Flipkart and Byju are also expected to join the ranks over the next several months. As per the chart below, 21 new tech unicorns have been minted in India this year alone. Over the next two years, we could see upwards of 28 new Indian tech companies enter public markets. India remains one of the most exciting digitization stories in the world today, especially as smartphone penetration picks up from a very low base.

Source: Inc42 Media. For illustrative purposes only

Outlook

The Digital Revolution Just Getting Started: When McKinsey and Company published a research piece back in 2012 on the rising emerging market consumer wave, they called it “the biggest growth opportunity in the history of capitalism”. A hyperbolic claim to be sure but a statement that planted the seed that lead to the creation of EMQQ and now the best barometer to providing the evidence for such a claim. Having posted performance numbers that put the index at the top of its respective category, we see 2021 as a unique tipping point in this global digital revolution story. With China providing the lion’s share of growth in the ecommerce and internet space for the past decade, we are now seeing the second leg of growth coming from geographies that were slower to adoption but comparably powerful in population and scale. The likes of India, Africa, Southeast Asia, and South America will drive the second half of this transformational story as hundreds of millions have yet to obtain a smartphone.

Gen-Z Will Write the Next Chapters: This next wave will come from the world’s youth with 9 out of 10 Gen Z coming from emerging markets. The consumption preferences that will be shaped by this demographic will prefer not to use cash but mobile payments, prefer streaming content over any cable provider, watch more esports than traditional sports, and certainly favour e-commerce over the mall. 

Where the Growth is: Broad based indexes for EM we believe represent a significant value trap being saturated with SOE’s and consequently depressed valuations with little growth. The isolated internet & ecommerce names represent some of the strongest growth rates not just for a few names but the entire sector.

Learn more about our emerging markets ETF here