Q&A: Betting on internet commerce in emerging markets

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Posted: Jun 23, 2016 2:37 PM
Q&A: Betting on internet commerce in emerging markets

LOS ANGELES (AP) — Funds that focus on companies that serve emerging markets have been mostly faring better after a rocky start to the year and a lackluster 2015, when worries about China's economic woes and volatile prices for oil and other commodities weighed on the category.

But what are the prospects for gains this year?

Kevin Carter, founder of the Emerging Markets Internet & Ecommerce exchange-traded fund (EMQQ), says he's betting on consumers in China, South America and elsewhere increasingly seeking to go online and buy goods and services on mobile phones.

"The greatest growth story of our lifetime is this huge wave of consumers getting smartphones," Carter says. "And when they get that smartphone it's the first time they're getting the internet."

His ETF owns all of the publicly traded internet companies in the developing world, including some big names in China's internet and e-commerce space, such as Alibaba, Baidu, Tencent and JD.com, which recently struck a deal to take over Wal-Mart's China operations.

This is a more targeted approach to investing in emerging markets than putting money in stock funds and ETFs with a broad swath of holdings in emerging markets. One benefit is it also steers clear of companies that are more susceptible to the volatility in commodity prices.

Even so, Carter's ETF is down 5.6 percent this year, as of Thursday. In comparison, several of the largest emerging-market stock mutual funds and ETFs are up anywhere from 3.3 percent to 7 percent this year.

Carter chalks that up to Alibaba and Baidu, two of the ETF's biggest holdings, being down this year. He remains emphatic about the prospects for growth for internet and e-commerce companies in emerging markets.

Carter spoke with the AP about where emerging market stocks are headed. Answers have been edited for length and clarity.

Q. Is this a good time to get into investing in emerging market funds?

A. Many of the emerging markets are obviously quite dependent on natural resources and oil, in particular, and that's been a big problem.

Emerging market indexes and ETFs that track them are both basically down for the five years ended in January. They have (since) had a little bounce.

I feel like they've probably bottomed, for the most part. But I still think the fundamentals are going to remain challenging. I'm not confident that they're going to go up a lot, but I think the worst of the going-down part might be over.

I don't see a lot of reason to be optimistic about the growth of the companies that represent the universe of emerging markets for investors.

Q. Why is taking a more focused approach to investing in emerging markets better than going with a broader index of emerging market stocks?

A. The thing about emerging markets, the big story, is the growth of the consumer, the growth of the middle class.

You have millions of people who are moving on up and they want a pair of Nike's and they want a washer and a dryer, and they want a smartphone. That's a big deal and it's happening. And a lot of companies are benefiting from it.

The real growth is in consumption, and that's going to continue.

Q. Your ETF is focused on internet and e-commerce, but it's down this year. How do you feel about its prospects?

A. I'm actually quite positive, and the reason is we launched the fund 18 months ago and it's down about 15 percent. Meanwhile, the fundamentals of the companies are 50 percent bigger than they were 18 months ago.

It's a coiled spring for the internet names. They may have been a little pricey at the particular time we launched, but the fundamentals continue to power forward. You're paying 20 percent less for 50 percent more, so that's why I feel quite optimistic about the fund at today's prices.

Q. A little more than half of your ETF is made up of Chinese companies. Do you see red flags for emerging market stocks given China's economic problems?

A. A lot of people question China's growth. There's a great negative bias on China and everyone is skeptical of everything.

But you look at the numbers for Nike or Apple or Starbucks, and it's pretty clear that there's growth going on in consumption in China and the rest of the developing world.

China is definitely going to have the most growth in terms of absolute dollars. In terms of rate of growth, year-over-year percentage, India and almost everything else should grow faster, with maybe the exception of South America.

All over Asia, all over Africa and certainly in India you have really phenomenal growth rates for internet adoption, smartphone penetration and e-commerce.