Webinar Replay: Emerging Technologies in Emerging Markets
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Welcome to today’s webinar, “Emerging Technologies in Emerging Markets,” presented by Chelsea Rodstrom of Global X, Brian Comiskey of the Consumer Technology Association, and Ben Jones of NASDAQ. Even though emerging markets are the home to the greatest proportion of consumers with the highest contributions to global consumption investors often focus on US technology stocks when it comes to growth. With rising purchasing power, and internet connected populations unrivaled by more advanced developed markets, the emerging markets present attractive growth opportunities for investors looking to gain exposure to the booming internet and e-commerce scenes.
Chelsea Rodstrom is a Research Analyst with Global X ETFs. She joined Global X in 2018 as a Research Analyst with a focus on international macroeconomics and geopolitics. Her research includes unique insights and analysis across a range of geographies including China, Europe, and the Latin American Region.
Brian Comiskey is the Manager of Industry Intelligence at the Consumer Technology Association. In Brian’s role, he is responsible for researching and developing stock market universes for the portfolio of indices on which the Consumer Technology Association and NASDAQ collaborate. Brian also serves as the CTA’s lead industry analyst and forecaster for several technology categories including video and audio streaming and smart home.
Ben Jones is a specialist on NASDAQ’s Index Research and Development Team. Ben’s role involves supporting the research and marketing efforts for NASDAQ’s indices, helping to build new or enhance existing indices, and supporting NASDAQ’s ETF partners in the sales team through outreach and engagement activities.
Awesome, thank you, Bob, and hello to everyone at home. Welcome to today’s presentation. My name is Chelsea Rodstrom. I’m the Research Analyst at Global X that covers emerging markets and our international access ETF, including our emerging markets, internet, and e-commerce ETF (EWEB), which we’ll be discussing more today. As Bob mentioned, I’m joined today by our colleagues Brian Comiskey from CTA and Ben Jones at Nasdaq who both produce content related to the themes underlying EWEB.
Very briefly, Global X is a New York-based ETF issuer. We have more than 70 ETFs with more than 20 billion in assets under management. While we have six different fund families, we have a particular focus on Thematic Investing, which is our largest family by assets under management at over 11 billion.
For today’s agenda, we’re going to hop from this intro into a discussion why investors may look towards the emerging markets if they’re looking to gain access to high growth names within the internet and e-commerce space. We’ll also touch on how certain structural changes that support these themes has really accelerated during the COVID-19 pandemic. We’ll discuss key markets and companies within the space.
Then we’ll have Brian Comiskey from CTA expand on that part of our discussion before handing it over to Ben at NASDAQ, who will speak more about the index construction behind our emerging markets, internet, and e-commerce ETF. Then we’ll wrap it up with some closing comments and a Q&A. If you have any questions, please don’t hesitate to send them our way. We’ll make sure that they get addressed either in the Q&A or with follow-up.
Before we discuss many of the disruptions we’ve seen and that we expect to see during this very unprecedented era, I wanted to briefly explain what thematic investing is and how it can be used by investors. Thematic investing is a really forward-looking investment approach. It refers to the process of identifying very powerful macro-level trends and the companies that stand to benefit from the materialization of those trends. It’s a top-down, bottoms-up process designed to enhance a portfolio’s long-term growth potential.
At Global X, we utilize a three-step process to identify powerful themes. That includes conviction, investability, and time frames. That’s influenced the development of more than 20 of our thematic ETFs that we have available today.
COVID-19 has played a very important role in thematic investing by dramatically accelerating the adoption of certain technologies, especially those that enabled digital experiences in light of restrictions on in-person activities. In our view, these have been unprecedented changes. From a very high level, we see there being four phases to the economy as it relates to COVID, the first being the pre-COVID-19 economy. That’s when we generally knew about COVID, but it was largely limited to China. It was unclear that it would reach the US borders. Investors, for the most part, remained focused on general macro-trends, like the phase one trade deal with China.
Then we had the stay-at-home economy, which I think we’re probably all very familiar with. It’s been the handful of months that large swaths of the US shut down schools completely, offices, stores to contain the spread of the virus and give hospitals time to scale their capacity.
The reopening economy is where we find ourselves today. That’s the delicate transition period between staying at home and returning to the outside world. Some offices, schools, stores, restaurants are reopening or reopened but have limited capacity. That fluctuates. The new rules and new norms are being put into place to safely add capacity, but many of these new policies are tentative. They’re untested, and they’re subject to change at a moment’s notice. Hopefully, if all goes well, we’ll soon exit the reopening economy, and we’ll begin to experience a new normal where schools and businesses are open, but with established rules and practices in place for the foreseeable future to keep us safe.
Before we dig into the details of the reopening economy and which technological trends may benefit, we want to first take a look back at the stay-at-home economy to see how that unique environment had a dramatic impact on certain themes. The stay-at-home economy focused on containing the spread of COVID-19 by requiring millions of people to stay at home. At a moment’s notice, consumers, employers, and students had to adapt to that new reality. That meant they couldn’t travel to public spaces.
One of the structural changes that we’ve seen accelerate over the last year because of COVID is in retail. E-commerce sales in the US surged nearly 45% in Q2 of 2020 versus the same quarter back in 2019 as shoppers stayed home and turned to online platforms rather than visiting stores to buy their groceries, or their healthcare products, or goods for their homes in a safe manner. While growth in the US has been quite impressive, e-commerce penetration is much higher in other countries.
In China, for example, e-commerce as a percent of total retail sales reached 37% this year versus 15% here in the US. Over the coming years, ecommerce is supposed to grow at a CAGR of roughly 31%. By 2023, it’s expected to represent 64% of all retail sales in China. That’s pretty remarkable growth given that China achieved 37% this year, and the US is still back at 15.
Another segment of the market, which we saw accelerate during COVID, was in the video game development space. With more people joining the gaming community, and more hours spent at home gaming, game developers saw revenues surge 25% year-over-year as both seasoned and new gamers found much needed entertaining and social interaction on those gaming platforms. Interestingly, video game developers experienced the fastest growth in emerging markets due to a confluence of factors.
I’m going to use China here, again, as an example. In 2020, China was projected to become the largest e-sports market in the world, generating over $1 billion over the course of the year. Latin America and Southeast Asia are also really interesting. Those are the fastest growing markets for online gaming with Southeast Asia growing 13.9% in 2019. That’s even before COVID.
One of the reasons that video game developers are able to grow and scale faster in emerging markets is because they have better access to those markets. Gamers in the emerging markets are beginning to spend more time online, or they’re having their first experiences online as internet penetration rises in those countries and as streaming speeds improve.
There’s also lower barriers to entry in the emerging markets because of lower costs for these developers. There’s easier access to software for those gamers, and because of local talent development, things are really starting to take off.
Lastly, one thread that runs throughout technology related themes, not just video gaming or ecommerce, is that emerging markets have a very unique capability to leapfrog, which means that because in many cases these markets haven’t had any experience with newer technologies like the internet, they can forego legacy technologies like gaming consoles in favor of the latest technologies. In this case, it would be game streaming technologies rather than those consoles.
As mentioned earlier, COVID-19 forced people around the world to utilize digital technologies in lieu of those in-person experiences. That’s no different in emerging markets where internet and e-commerce companies largely benefited from this unique environment. People still needed to buy food, groceries, goods, but increasingly, they’ve relied on internet-based companies to deliver those products. In addition, entertainment and social interactions were largely limited, which caused many to look to digital platforms to connect with their family, and their friends, and to engage in movies, and games, and music.
We believe that COVID-19 served as a long-term accelerant for these companies. The pandemic introduced consumers across generations and across geographies to new technologies, which they are likely to continue using in their everyday lives even after we have a widely distributed vaccine available. People who aren’t necessarily going online to do their grocery shopping, for example, may find it so convenient now that they never want to go back to a grocery store like they may have before.
While a post-pandemic economy isn’t likely to look exactly as it did before, the long-term tail winds for emerging markets, which includes structural changes related to demographics, and a shift in consumption, which is very tied to digitalization are unlikely to reverse. That presents a very strong case for the long-term structural growth within emerging markets, internet, and e-commerce.
As we enter 2021, I just briefly wanted to go over our outlook for the emerging markets. Our outlook for the year remains bullish on the international space in general and emerging markets in particular. That seems to be pretty in line with what most people voted on in that first question, which is group C. I think we all recognize that with US valuations at record levels, a solid ten-year bull market, and a weakening dollar, international investments are garnering more attention from investors in 2021 looking for newer sources of return.
More specifically within their emerging markets, we see numerous potential tail winds that are attracting investor interest. That includes high GDP growth expectations, rising commodity prices due to global reflation, and in many instances, less severe economic impact from the pandemic.
Lastly because emerging markets tend to experience sharper sell-off and demonstrate greater resilience in developed markets following global market slow-down, we see them as particularly attractive during the recovery period. We believe it’s also important to keep a close eye on Asia, which could see a very strong recovery this year on the tails of China’s very strong performance last year.
Chinese equity markets almost doubled the returns of global markets last year in 2020 as the country enforced very strict lock-down measures and was able to reopen its economy much sooner than many developed markets. Other Asian countries like Japan, South Korea, and Vietnam were also able to keep the virus relatively contained and reduce economic destruction.
As global growth accelerates this year, Asian emerging and developed markets may be especially well-positioned given the increased cooperation we’ve seen throughout the region with the signing of RCEP, which is the Regional Comprehensive Economic Partnership, the largest pre-trade agreement, globally, in late 2020.
With the long-term trend of slowing economic growth in developed markets, emerging markets are now driving the majority of global economic growth. Much of this growth is attributable to several tail winds in emerging market economies.
Emerging markets are becoming increasingly dynamic. They’re transitioning away from purely commodity exports and low cost manufacturing to very high tech services and consumption-driven growth. That trend is further accelerated by the fact that emerging markets have younger, and larger, and faster growing populations than the developed markets.
As workers are migrating more and more from rural to urban areas, they’re becoming more educated and increasingly competitive for those service sector jobs. As those economies have turned to higher value add industries, wages have also increased. That’s driven disposable incomes up, and retail sales, in turn, have accelerated.
Between 2000 and 2015, emerging market populations grew by 21% while retail sales per capita grew roughly three times higher, rising from $525 to $1490. Emerging markets share of total global retail sales rose from 32% in 2000 to 51% in 2015. While emerging market retail sales growth outpaced developed markets with a CAGR of 11.4% between 2000 and 2008 versus just 5.7% in developed markets over the same time period.
Wage growth is also helping to shift the socioeconomic profiles of many of these countries, especially those that are in Asia. At a very high level, there were 3.2 billion people in the global middle class in 2017 with an estimated 150 million more joining annually. Overwhelmingly, with the projected 88% by 2023, these new entrants are going to be from Asia, and while the growth of the middle classes in the US and Europe remains pretty slow at .5% to 1% annual growth, emerging markets overall are forecasted to grow 6% or more on an annual basis over the coming years. As consumers earn more, they begin to spend more. They expand their spending beyond just those basic necessities to include discretionary items as they achieve greater standards of living, and in tandem with the expansion of GDP in emerging markets has been a simultaneous growth in wages and consumption, the latter a result of government policy really striving to make consumer spending a greater contributor to overall GDP. That wage growth translates into greater spending on consumer goods, again, particularly in the retail and e-commerce space with China being another example here becoming both the largest and the fastest growing e-commerce market globally.
Another important tailwind for emerging market growth is expanding internet penetration and the adoption of smart phones. Global internet access has grown ten-fold over the last 20 years from 4% to 40%. Unsurprisingly, internet use is highest in advanced economies where nine out of ten people use the internet, but in the emerging markets like in Mexico, for example, where usage is expanding very quickly, only 45% of Mexicans used the internet in 2014 versus today when nearly 73% do.
At the same time, smartphone access is increasing rapidly with smartphone penetration anticipated to reach 80% globally. Internet penetration is already high, again, in developed markets and in certain emerging markets like China, but now smartphone ownership is expanding rapidly in some of the world’s largest developing countries. That includes countries like India, Indonesia, Nigeria, Pakistan and Mexico. Likewise, although smartphone usage and internet penetration are already high in markets like China, there’s still room for growth given the size of China’s population and the lower rates of penetration in smaller cities and rural areas. With greater coverage, more sophisticated technologies, and a shift in those consumer preferences, China’s expected to overtake the US as the world’s largest mobile market by revenue by 2030.
With these numerous tailwinds converging, a large population with rising incomes and greater internet connectivity, we believe emerging markets are primed to see substantial growth in internet-related consumption. Essentially, we’re witnessing the rise of a new global middle class that’s establishing its consumption habits online first and is, therefore, expected to be a major driver of internet-related growth over the coming decade. I’ll hop back on later to discuss how to gain access to these themes with our EWEB ETF, but for now, I’ll hand it over to our colleague Brian at CTA to discuss some opportunities in emerging markets.
Excellent. Thanks so much, Chelsea. My name is Brian, and I am the manager of Industry Intelligence here at the Consumer Technology Association. In my segment of the webinar, I’m going to dive into some of the key trends that CTA research has identified around emerging markets, internet, and e-commerce. Furthermore, we’re going to examine some of the next frontiers for growth in this space and identify some challenges and opportunities on the horizon.
Let’s get a little bit of background on CTA, right, the Consumer Technology Association. As North America’s largest technology trade association, CTA is the tech sector. Our members are the world’s leading innovators from startups to global brands, helping support more than 18 million American jobs. CTA also owns and produces CES, the most influential tech event in the world. In terms of the thematic index and investment space, CTA’s entering its 11th year of working on thematic index research. I represent just one member of a team of analysts that employs a combination of research expertise, a diverse background of education, and a deep technical knowledge to study a variety of technology areas.
Most recently, we’re actually just coming off our first ever all digital CES here at CTA, which featured almost 2000 exhibitors last week and made history as the largest digital tech industry event. Notable for today’s webinar, 26% of exhibitors at CES 2021 hailed from 15 different emerging markets countries. A little under half of those exhibitors were startups. This really underscores the role CES plays in identifying the most innovative companies from across the world and especially in emerging markets.
Moving forward, from CTA’s perspective, why emerging markets, e-commerce, and internet? Chelsea did a tremendous job touching upon a lot of the trends that we’re seeing in emerging markets. I know here emerging markets hold significant potential as they sit at the intersection of three key growth trends. Rising smartphone penetration rates. As Chelsea stated earlier, smartphone penetration per a study from GSMA is expected to reach 80% globally by 2025. The three countries contributing the most to this increase are India, Indonesia, and Pakistan. Those are three emerging market economies that are really driving this grown.
On the improving internet infrastructure side, it’s really important to note that we’re seeing the rise of the mobile internet generation, right? 70% of smartphones are going to be running on LTE reflecting the dominant influence of that generation. Then finally, the last trend in emerging markets is large youthful populations. One of my favorite statistics that really underscores this is nine in ten members of Gen Z live in emerging markets per the latest research from Bank of America. At CTA, the thing that we have noticed over and over again is the primary display that most members of Gen Z interact with, not TVs, not laptops, but instead, their smartphones.
With that, right, internet and e-commerce is a compelling scene that sits at the nexus of these key growth trends. COVID-19 has really only hastened the trend towards a more digital, automated, and remote capable global economy. Finally, to cap off this slide, I really like this visual from Global X, actually, that looks at Singles Day performance versus Prime Day performance, comparing Alibaba to Amazon, right? You just can see the staggering growth over the last few years of Alibaba’s Singles Day.
Moving on, I think it’s key to know that two trends lie at the heart of this deepening digital landscape in developing economies. One, the role of e-commerce companies as incubators for technology adoption, and the second, which is COVID-19 – the COVID-19 pandemic as an accelerator for internet business evolution. Diving into that first trend, really China sets the stage. I think it’s important to recognize the e-commerce incubator trend really as beginning with the promise – or tracing back to the meteoric rise of two Chinese e-commerce gains, right, Alibaba and JD.com.
An example where past is prologue a bit, the 2003 SARS crisis arguably served as the catalyst for the initial Chinese e-commerce boom. JD.com was really only offering – positioned itself as an electronics e-commerce site, and Alibaba was more consumer – was more B2B e-commerce, so with the outbreak of SARS in 2003 you saw both companies really expand their offerings in JD’s case beyond electronics to Alibaba going beyond B2B to consumer-facing e-commerce with the launch of Taobao. This is important, right?
Although e-commerce operations remain a significant component of their businesses as seen in the previous slide around Alibaba’s record Singles Day sales this year, the greater impact is how the rise of e-commerce here in China as well as other countries has paved the way for other innovative internet-based technologies in these regions. A key phrase for this to remember, right, is the Super App. Super apps offer services such as internet search, online entertainment, digital payments, and of course, e-commerce from a single interface that captures a greater amount of the user’s time. That model really, right, was pushed forward by JD.com and Alibaba, and now what we’re seeing is an emulation of this super app growth strategy across other emerging markets as well as in some other Chinese upstarts.
In particular, right, as I note here in the footsteps of giants, referring to Alibaba and JD.com, a newer Chinese e-commerce company, Pinduoduo, is pivoting from being an e-commerce company to really emerging into a super app that has a deeper, richer internet-based ecosystem, right? Moving beyond e-commerce, Pinduoduo has augmented its offering to include an AI drive and demand-based delivery solution, and they’ve also launched a live streaming service to bolster the e-commerce trade for the – actually the agrarian economy in China. Pinduoduo’s notable in that they are actually doing a significant push into the more rural regions of China outside of what has traditionally been a focus on the larger, urban areas, but we can also go beyond China when we think about the rise of e-commerce as incubating and growing a larger ecosystem.
Argentina stands as another prime example here with the e-commerce platform MercadoLibre. What was different about MercadoLibre’s growth is in Argentina, they face a different and unique regional challenge in a vastly underbanked population. As a result, it curbed the ability to purchase goods digitally, right? You can’t really create an online marketplace if people don’t have an online means to pay, so as they were launching their service, MercadoLibre actually developed their own digital wallet and payment system within the service called MercadoPago. As of today, MercadoPago drives one third of MercadoLibre’s site purchases and spurred regional growth of just the online payments industry, right?
Here you see an example of e-commerce pushing another internet-based technology in the form of online payments, and so you have companies like Pagseguro and StoneCo that have emerged in the space as well, and in fact, the Latin American payments market for digital payments is expected to grow at a CAGR of 17% through 2024. Those are just two examples, however. Argentina, right, gave us a good illustration of a regional approach to e-commerce as an incubator.
There’s other good examples, especially of the super app growth model, like in India, for example, where you have a company like Flipkart. Part of Flipkart’s push into the super app space has been led by a video feature that they’ve been launching. This looks to add video streaming right into the arsenal of offerings in their interface. That’s actually a very logical step for Flipkart in trying to capture more of the Indian consumer’s time because video streaming is set to comprise 75% of India’s mobile internet use by 2021, and it’s not just India. You see Gojek and Grab as other great examples of the super app push in Southeast Asia. That’s the focus of e-commerce as an incubator.
That really brings us into our second trend, right, the pandemic as an accelerator, and I’m really happy that Chelsea dived into some of these things in her earlier segment of the presentation. As we begin to think about it, I’d like to focus on this really lovely quote from British economist Christopher Freeman. “Innovation accelerates and bunches up during economic downturns only to be unleashed as the economy begins to recover, ushering in powerful new waves of technological change.” Another good way to think about it is necessity is the mother of invention, right, and so we highlighted one example in connection to the rise of Chinese super apps amid the 2003 SARS pandemic, but we can even look as recently as 2008 to the financial crisis as it spurred a litany of innovative tech companies to the forefront in industries such as fintech, ridesharing, and online travel booking, and we’re starting to see that now in online-based businesses in particular, right?
This snapshot offers some really staggering figures, right, about what as McKinsey describes in the report that these figures come as the next normal consumer, right? What is the new normal economy going to look like, and we’re starting to get glimmers of this through some of these statistics, like e-commerce, ten years and eight weeks in terms of the e-commerce deliveries, but it’s beyond e-commerce, right? Telemedicine, a 10x increase in virtual appointments in just 15 days globally. Remote learning, 250 million students went online in just two weeks. Then you have streaming video. This number jumps out at me in particular.
Disney+ launched at the end of 2019, and they just recently hit – they hit 50 million subscribers in five months, which is – to reach that 50 million subscriber milestone for Netflix, it took them seven years. It’s really important to think beyond even Netflix and Disney and focus onto the emerging market side. iQiyi in China saw 25% growth in subscribers amid the pandemic in Q1 2020, right, and it’s not just growth in subscribers. We’re also talking about the launch of new services. US-based, we think of services like Peacock and HBO Max growing, video streaming side, but also, again, South Africa, you have MultiChoice, a paid TV provider, launching a new service at the end of the 2020 called DStv as they’re really seeking to compete against a growing influence of Amazon and Netflix in their own country.
When I talk about streaming video, I’d be remiss to not mention the critical intersection here of this industry with the video game industry. CTA research and in some of my own writing as well, we’ve noticed that video games have emerged not just as a fun form of entertainment but really as a dominant social media platform during the pandemic, right, and video game live streaming services has capitalized on this trend. Most people are probably now familiar with Twitch, which saw 57% platform increase in the pandemic, but it’s important to highlight Chinese companies DouYu and Huya as well that are giants in the emerging market video game live streaming space. DouYu saw a 26% growth in paid subscribers in the first quarter 2020, and Huya subscribers rose 18% year over year in Q4 2020. What I will note about both of those companies, they’re backed by Tencent, and we’re actually – right now, they’re actually exploring a merger between both of those services, which is only going to accelerate China’s role as a video game live streaming giant.
With that, right, what does this mean? It means the pandemic is only hastening the arrival of the on-demand economy and lifestyle. What is the on-demand economy? It can be defined as the economic activity created by digital marketplaces and technology companies to fulfill consumer demand via immediate access to goods and services, or as I like to think of it simply what can you do from a couch simply with a smartphone. I can now stream any show or podcast that I want to listen to. I can search for an answer quickly via internet search. I can book travel via online travel agency. I can order groceries in less than an hour, and then even when I’m ready to leave the couch, I can use an app to hail a ride to let me leave my apartment. All at the fingertips, and this is growing across the world.
This wonderful visual from TeleGeography, right, shows international peak traffic growth 2019 to 2020, notably the two leading growths were Asia and Latin America at 51%. Internet use increase according to the World Economic Forum increased by 70% due to COVID-19. Here the pandemic is really accelerating internet connections, and let’s go even further, right? E-commerce is really a good steppingstone, right, to that larger internet ecosystem. You see in Southeast Asia 40 million people came online this year for the first time across Singapore, Indonesia, Malaysia, the Philippines, Thailand, and Vietnam. That led to a 63% growth rate in the e-commerce sector of these countries this year – or this past year. Sorry, we’re in 2021.
Latin American e-commerce sales are expected to grow 19.4% from last year to about $84 billion per E-Marketer Forecast. This means 38.4% of the region’s population engaged in some form of e-commerce in 2020. This is absolutely staggering, right? This is how the pandemic is only going to accelerate that e-commerce as an incubator for a larger internet business, right? It’s almost like a wonderful cycle of internet business growth.
Let me take this opportunity to quickly dive into a couple of those other industries that I focused on in that previous slide about growth during the pandemic, the first being telemedicine, right? Launching online COVID-19 consultations in January, Ping An Healthcare Technology through their Ping An Good Doctor service registered more than a billion visits in the first three weeks and saw 56% increase in telehealth sales. They’re just one of a wave of Chinese telehealth solutions in the pandemic including AliHealth, JD Health, and Tencent’s WeDoctor. As a result, the World Bank is now estimating a 19.3% annual growth rate for telehealth by mid-decade.
Beyond telehealth, we go to remote education. While China is often talked about in this context for emerging markets through a host of online education companies like New Oriental Education and Technology and Cool Learn Technology, the pandemic has spotlighted the rise of the Brazilian remote learning environment. Since the outset of COVID-19, 49.4% of Brazilian schools hired one or more educational technology firms. Arco Platform is one notable example of a company that’s enjoyed revenue growth as a result of this, and then a great story, too, is Afya Limited, which was a medical tutoring platform and did a lot of textbooks, pivoted to online courses to support healthcare professionals amid COVID-19. It’s really used this time as a renaissance to transform into a digital education company. This is not the end of the Brazilian market where you see the ecosystem having Vasta Platform IPO in 2020 as well as digital education firm Vitru. What this translates into is Research and Markets projects the global online education market to reach a value of $350 billion in the next decade.
Moving beyond these two trends, I always think it’s fun and interesting to look at who are the next frontiers, identifying these emerging market countries that are seeing growth in their internet economy. This first is Malaysia. Malaysia has a 83% smartphone penetration rate, which is the second highest in the Southeast Asian region after Singapore, which means it’s ready to support rapid internet business growth, and it already is seeing that e-commerce ecosystem start to flourish with major players like Mudah.my, Shoppee, and Lazada. Notably, all those companies are backed by e-commerce giants in neighboring countries such as Alibaba and Singapore’s Sea Limited.
I really like this visual to the right here, too, because this is showing growth by US billions per sector of various online businesses. Obviously, it should come as no surprise that online travel was the only sector that saw some contraction between 2019 to 2020 given COVID-19 lockdowns, but just – the just pure growth in e-commerce online travel but also online media and transport and food delivery. In a report – this visual comes from an excellent report called the e-Conomy Sea 2020 Report by Google, Temasek Holdings, and Bain & Company.
The second frontier company I’ll highlight today is Chile, which oftentimes gets a little bit overlooked to be frank especially in south America after Brazil and Argentina. Chile boasts one of the highest internet penetration rates in the region and has the third highest 5G penetration behind Brazil and Mexico, so already well positioning themselves for the future internet economy with these better broadband access piece. Notably, Chilean retail giant Falabella especially amid this pandemic joined a regional trend of omnichannel strategy adoption, so pivoting really from physical retail commerce, leveraging its recent acquisition of Linio to bolster its e-commerce presence.
Linio’s actually an interesting acquisition for them because they found that e-commerce growth through Linio’s top performing countries, which include Peru and Colombia, so again outside of the typical Southern Cone countries. That omnichannel strategy is unfolding in Brazil as well, as demonstrated by companies like Lojas Americanas and Via Varejo. Foreign companies are already taking note of the promise of the Chilean digital business environment with last year’s acquisition of grocery delivery Cornershop by Uber.
Finally, the last frontier I’ll highlight today is in Nigeria. Beyond South Africa, Nigeria represents a promising frontier for growth in Africa. I really like this visual from GSMA as it illuminates just sheer amount of mobile internet user growth for Nigeria but also highlights some of the excellent growth opportunity in other countries in Africa like Ethiopia and Kenya. Africa is seeing – Africa as a whole, right, is seeing a 30% annual increase in mobile phone connections since 2000. Then Nigeria really came on the map with 2019 IPO of Jumia Technologies, an e-commerce that had positioned itself as the Amazon of Africa, but since you’ve seen 400 startups valued collectively at $2 billion emerge as a result, and Lagos itself has really transformed into a fintech hub that’s home to a homegrown unicorn Interswitch.
Then to conclude my segment of the presentation, I want to look briefly at what is on the horizon. Bridging the digital divide represents a significant challenge globally for both emerging markets as well as developed markets. The US actually has 13% of citizens without reliable broadband access. COVID-19, right, has really despite pushing forward so much growth in all of these online businesses has exacerbating existing global socioeconomic disparities in emerging markets.
International Telecommunication Union annual report noted that about 54% of the world has access to the internet, and companies have already started to recognize that this divide actually represents a tremendous opportunity. Pinduoduo has staked its future on addressing the rural e-commerce internet gap in China that stands at a sizable 39% of Chinese citizens that remain offline, but while I look at this slide as showing significant challenge, then this one in my view shows a bit of hopeful opportunity. What you’re looking at is a chart displaying 5G network launch status across the world.
Notable is the active investment in launches throughout emerging markets in Latin America and Southeast Asia. Africa even shows the diffusion of investment around major regional hubs like South Africa into Lesotho, Kenya into Uganda, and especially in Nigeria where we see active 5G investment in neighboring Cameroon as well as nearby Gabon and Republic of the Congo. 5G represents the potential to bolster underlying digital infrastructure to both bridge the digital divide and bring the remaining 46% of the world without access to the internet to the digital market. Put simply, there still remains a significant amount of growth potential to internet business and e-commerce, especially in emerging markets. With that, I’m going to turn it over to my colleague Ben Jones at Nasdaq. Thank you.
Great. Thank you so much, Brian. Listening to your remarks brought back a lot of memories. Interesting enough, I have some experience in emerging market e-commerce. When I first got into this business, I was working for Dorsey Wright, which is now a Nasdaq company, and we invested in a social media company in India, and this is 2010, 2011. It was essentially a social media financial company or finance company, think of FinTwit today or Wallstreet Bets on Reddit where traders would talk about what they’re investing in, and they would look for research, and we were providing research at the time delivered via the internet, so think research as a service.
The problem was members of the social community, they wanted this research. They wanted this signal. They wanted these models, but they didn’t have a way to pay for it, right? The only way at the time that was acceptable was cash on delivery, so imagine trying to buy an internet service such as some of the streaming services like Disney, but you have to pay COD, right? Of course, it didn’t really work out, but that was 10 years ago. We basically have seen this lost decade for emerging markets, and during these past 10 years, we’ve seen emerging market economies evolve and mature especially with respect to internet and e-commerce.
What I’m going to do over the next few minutes is show you how we track this space through the Nasdaq CTA Emerging Markets Internet and E-commerce Index. We have a symbol QNETEM, and then ultimately, Chelsea will conclude with how to access it, right? Let’s start by tracking this space. We set the stage, right, the opportunity, over the past few years, we’ve seen growth in this space. Euromonitor International recently released some data. That’s the chart on the left-hand side showing internet retailing value per year in selected emerging markets. I think anyone can read that chart. Basically, you can see it is growing, right, in terms of just retail value within those emerging markets.
Of course, not the elephant in the room but the dragon in the room of China. Earlier this year, The Economist, one of their volumes actually covered this space. It actually was the cover, the future of e-commerce with Chinese characteristics. What Chelsea talked about is that the Chinese e-commerce space is potentially going to grow to 31% CAGR over the next four years. That’s massive growth. What’s interesting is the Western markets and companies are taking notice. They’re learning from how China is growing their e-commerce space, how they’re interacting with consumers, how they’re bringing these products to market in unique ways.
That’s the opportunity. How do we track this? How do we track this space across all the different emerging markets? What we’ve done, we’ve basically combined leading experts in consumer technology with a transparent rules-based index, so the CTA has partnered with Nasdaq. The Nasdaq CTA Emerging Market Internet and E-commerce Index is designed to track the performance of emerging market companies in the internet and e-commerce industries. The companies are selected based off a classification determined by CTA. Again, Brian has shown you that the CTA, they’re experts in not only how consumers interact with technology but the companies that are actually inventing these technologies and bringing them to market and more importantly, just the technologies themselves.
When we think about internet and e-commerce, basically, it’s simple. It’s just these companies, their primary business includes internet retail commerce, internet-related services, internet software or search engines, and that’s determined by CTA. I think what’s important here is that these companies need to at least derive 50% of their revenue from the internet or e-commerce-related activities, and that is determined by CTA. Let’s look at the methodology, right? As you know, it’s an index. It follows a set of rules, basically a simple algorithm.
Currently, this index is comprised of 49 publicly listed companies at this point in time. Again, 50% of their revenue must come from internet or e-commerce related activities as determined by CTA. We need to see a minimum market cap of one billion in US dollars. We need to see a minimum of six-month average daily trading volume of $5 million, and in order for companies to remain eligible for this index, they need to remain at an average trading volume around $3.5 million. It’s reconstituted and rebalanced on a semiannual basis, so think March and September.
We look at different characteristics of this index. You’re going to see companies and names that may not be household here in the United States, but they are in China and Brazil and South Korea. We see names like Pinduoduo that Brian referenced, which makes up a large portion of this index. You see JD.com, Baidu, Tencent, Alibaba, MercadoLibre. These are names that are delivering innovative businesses and solutions and services to all these different emerging market economies as well as globally. If you look at where this index has exposure to, right, if you think from a constituent standpoint, what countries are represented, you can see China makes up about 73% of the index. The other two largest companies from an exposure standpoint would be South Korea and then Brazil. We see growth within Latin America, e-commerce and internet.
If you think about size, what do these companies look like? There’s a wide range of sizes where we have – let’s say the smallest size companies are at around 600 million so just under that cap right now of one billion to over 690 billion from a market cap standpoint. I believe that number’s actually north of 700 right now if you look at more up-to-date data. This is actually at the end of the year. We see the majority of – basically 99% of companies in this index are classified as large- or mid-cap. There’s a very tiny sliver of small-cap, and that’s quite different from one you see in, say, the Nasdaq Emerging Market Index where you see a growing or a larger percentage of mid- and small-cap names. Right now, it is tilted towards large-cap giving you that large-cap exposure or at least tracking that space, rather, within this space. Again, large- and mid-cap is really where this index is oriented today.
Finally, what does it look like from an industry and sector standpoint What are these companies? What sectors are they engaged in? You can see that they’re going to be classified as consumer services or technology. About 56% of it is consumer services. About 35% technology. That’s as determined by the ICB, so you can see that’s where this index is currently tilted, but what I think is interesting is you look at a subsector level, the themes of internet and ecommerce play out, right? 32% are classified as ICB subsector of internet. You see about 30% in specialized consumer services, and about 17% of this index right now are classified as broadline retailers, so you cover the gamut of internet and e-commerce by looking at the subsector exposure today. That is the index. That’s how we track this space with that set of rules. You can see the composition. You can see the constituents. More importantly, Chelsea, how can advisors access this index?
Sure, so I wanted to touch here on how advisors connect with the index. Basically, as the newest addition to our thematic suite here at Global X, EWEB tracks Nasdaq CTA EM Internet and E-commerce Index. As Ben explained, invested in the 50 largest internet and e-commerce companies deriving a majority of their revenues from emerging markets. EWEB offers targeted exposure to some of the most tech savvy companies in the world, fastest growing markets, drafting behind multiple tailwinds like an extending middle class, broadening internet penetration, and a shift towards digital consumption.
Emerging market internet and e-commerce companies are likely to be the key drivers of global growth. EWEB has brought exposure to emerging markets as has been mentioned with a strong tilt towards some of the largest in EM, in China and fairly wide exposure across the rest of EM including Brazil, South Korea, South Africa. While majority of these names are considered part of the consumer discretionary sector, these internet and e-commerce firms don’t fit neatly into one sector. Rather, they span across sectors like communication services and information technology. That’s the end of the presentation, and I hope you enjoyed it. Let’s look at some disclosures before I hand it off to Ben to start us with the Q&A.
Why not just invest in a broad emerging markets fund, Chelsea, or in a fund that includes names from the developed markets. Do you have any take on that question?
Sure. That’s a great question. As many investors know, emerging markets are really attractive for their higher growth. What some might not know is that emerging markets are actually becoming major economies in their own right. They’re now contributing more to global growth and consumption growth than even the developed markets. This concentrated growth, which is happening in consumption, is also happening in tandem with the spread of technology, and that’s part of broader structural shift in the economy.
As consumers become more educated, they have higher wages. They move into bigger cities and get online. We thought EWEB would be a great way for investors to capture that higher growth in areas within internet and e-commerce, but also to be able to narrow their exposure to some of the fastest growing segments within emerging markets, which many investors may only have very broad access to through broad market indices.
Here’s another question that has come in, Chelsea, and this is for you – would be compared to other products, what makes Global X’s EWEB ETF different?
Sure, so there are dozens of leading tech companies in e-commerce and internet that harness emerging market consumption growth. There are also several emerging market index funds, many of which don’t tend to underweight or overweight things that are – that you get exposure to in EWEB. EWEB helps investors gain more targeted access to the most savvy tech companies in these markets, which are oftentimes regional giants but are often overlooked by US-based investors. EWEB is also very competitively priced versus other emerging market focused funds, and it’s got more concentrated exposure in those top EM internet and e-commerce than some of the competitors. It also has more exposure to emerging markets generally.
Okay, and so we have one more question before we wrap up. Let’s see. For advisors who are considering allocating to emerging markets broadly, what are the key questions they should be asking?
Advisors that are considering allocating to emerging markets broadly should ask themselves what exposure they’re getting by doing so. More importantly, they should be asking themselves what exposure they might be missing out on or what area might be underweight. Many emerging market indexes tends to have an overweight to the BRIC countries. That would be Brazil, Russia, India, China over other countries, or maybe they’re overweight toward sectors like financials and materials or staples that tend to have higher state ownership, and maybe advisors want exposure to and they’re hoping to gain access to a more growth-oriented portfolio comprised of companies that capture the real growth behind emerging markets, which is fueled by consumption and digitalization.
Okay. Just a final wrap up question. Where can we get more information on EWEB and internet and e-commerce companies that are in emerging markets?
We have a great amount of content and research on our research page. That would be Global X research. We have lots of stuff on thematic international and income investments. To read more about EWEB specifically, we have a launch post that dives into the specifics of EWEB. A lot of the graphics that you may have seen in the presentation are further explained in that post. We also have our EWEB fund page, all of which you can find linked to – in the resources with this presentation. If you’re on Twitter, please give me a follow. I love to talk about emerging markets, China, and internet and e-commerce. I know Brian also has a great Twitter, so – Twitter page, so feel free to give us a follow.
Awesome. I will definitely do that as well. I’ll follow you two. We had a lot of questions come in. Unfortunately, we weren’t able to get to all of them, so the folks at Global X will respond to you individually either via email or phone if we didn’t get a chance to answer. At the end of this webinar, a feedback survey will appear. We greatly appreciate you filling that out. For clarity, a rating of 10 means you liked this webinar, and a rating of one means you did not. Certainly, please give it a 10. I’m just kidding, but again, 10 means you liked it. One means you did not.
Finally, thank you to our presenters and to everyone for attending. On behalf of the teams at Global X, at CTA, and at Nasdaq, and everyone at Advisor Perspectives, we wish you are your family good luck, good health as we overcome the challenges posed by this crisis. Thank you so much for attending.
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