Developing Businesses

Emerging markets provide opportunities for growth, but these investments can come with considerable risks.

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Emerging markets are generally viewed as countries or regions which experience high rates of economic growth. The growth rates seen in emerging marketstend to be higher than those of developed markets, which on average usually have older populations and more established financial markets. Globalisation has provided access to new trade opportunities, with popular routes shifting over time and levels of economic activity between developing marketsalso growing.

Despite their potential for growth, investors should be aware that emerging markets also come with significant risks. Political instability, regulatory changes, and currency volatility can result in increased levels of uncertainty, which may impact investment returns. Consideration should be given to rule of law and corporate governance standards under these emerging marketjurisdictions. Currency volatility is also a significant risk to these markets, with a strong U.S. Dollar potentially providing downward pressure.

While some countries may experience higher levels of rapid growth, investing in emerging markets is generally seen as a long-term strategy. They can also provide investors with a degree of diversification, when compared todeveloped markets. Index maker MSCI has classified 23 countries as developed markets, with others falling into either standalone or frontier markets categories based on various markers, not just income per capita. Interestingly, South Korea is classified as an emerging market by some index makers, including MSCI, due to accessibility issues for investors. 

Taiwan Semiconductor Manufacturing Company ($TSMC)

Taiwan Semiconductor Manufacturing Company (TSMC) is a leading dedicated semiconductor foundry, providing services including design, manufacturing, and testing of microchips for various applications. The wafers produced by TSMC are used to create microchips that power countless electronic devices worldwide. 

While the demand for semiconductors is generally considered to be significant due to their role in high performance computing applications, investors should note that this category only accounted for 46% of TSMC’s revenues in Q1 FY2024. Overall quarterly revenues declined 5.3% as the order quantities from smartphone manufacturers are seasonal and this segment accounts for 38% of net revenues. Unfavourable exchange rates were another contributing factor. 

Another factor to consider is that many of the stocks representing foreign companies are American depositary receipts (ADRs), meaninginvestors should be mindful of currency volatility and other risk factors that potentially lower liquidity. TSMC’s ADRs have outperformed its shares listed in Taipei, and it is suspected there will be arevisionion to this valuation. 

MakeMyTrip ($MMYT)

MakeMyTrip  is an online travel booking services provider in India, offering flights, hotels and holiday packages. MakeMyTrip also provides related services that include foreign exchange, travel insurance and credit, in the aim to gain market share in the corporate travel industry. The company operates through a platform under the same name, as well as Goibibo and Redbus. 

MakeMyTrip’s growth can be tied to that of India’s, with its increasing per capita income and younger population, and limitedinternational expansionto date. Prospective investors should be aware that a slowdown in India’s economic growth could have a material impact on the company’s future earnings. Similarly, MakeMyTrip’s services could also be hindered, should the Indian government’s plans to increase spending on infrastructure bedelayed or changed entirely. 

Just over half of the company’s revenues stemmed from hotels and packages in the quarter ending 31 March 2024 with around US$105m of a US$202m total, while the air ticketing segment experienced the highest growth for the period, growing 41% from US$38m to US$55m. However, investors should consider the company’s significant spending expenditure for brand growth,which saw the cost of services increase by 23% to US$52m, employee expenses increase by 28% to US$43m and the marketing budget grow by 36% to US$31m for the latest quarter.   

Nu Holdings ($NU)

Nu Holding’s core offering to market is a digital banking platform, providing financial services such ascredit cards, digital accounts, personal loans, and other lending products. At Q1 FY24, the company had over  99 million customers, which attributes to 54% of Brazil’s total adult population. The company is currently working on expanding in Latin America, and has already entered the Mexican and Colombian markets respectively. 

The company is now investing in growth strategies, aimed at increasingits secured and unsecured lending portfolio to unlock new revenue streams. Investors should pay particular close attention to this business, with it’s riskier sources of income, especially in an environment with experiencing higher interest rates. The non-performing loans under Nu’s Brazilian consumer credit portfolio saw a slight increase from 4.1% to 5.0% in the latest quarter. 

Nu has managed to convert into a profitable firm, turning a net loss of US$45.1m in Q1 FY22 to an income of US$378.8m in A1 FY24. The company has estimated acost of US$7 in acquiring a customer and less than US$1 a month to service them, but investors should also consider that these lower amounts also translate to the consumer side. Average monthly revenue per active customer was at US$11.40 in the last quarter, with gross profit margins falling from 47.5% to 43.2% during this period. 

Exploring new options 

There are several ETF options for investors looking  to invest in emerging markets, rather than investing under individual stocks. ETFs are a great way for investors to gain access to multiple regions, as individual shares may be not available through trading avenues such as the OTC market. Many emerging market ETF products also carry a high exposure rate to Chinese firms in the underlying index, with specific countries having a potential impact on the overall returns.

The SPDR Portfolio Emerging Markets ETF ($SPEM) provides investors access to a range of companies across various regions. The $SPEM contains 3,443 holdings as at 17 June 2024, with a fee of  0.07%. The Schwab Emerging Markets Equity ETF ($SCHE) has some similarities to $SPEM, but with fewer holdings and an incrementally larger fee of 0.11% fee, which is something to keep in mind. 

Investors seeking dividend returns will be interested in the iShares Emerging Markets Dividend ($DYVE) or SPDR S&P Emerging Markets Dividend ETF ($EDIV) offerings, which both aim to select 100 dividend-paying issuers. While emerging markets are generally associated with less sophisticated financial systems, investors wanting to access smaller firms in these markets should consider the iShares MSCI Emerging Markets Small-Cap ETF ($EEMS). 

Scouting locations 

There are several ETF offerings relating to the region of Asia, whereas other regions such as Latin America, Africa, Eastern Europe and Central Asia have lower levels of representations of ETFs in their respective financial markets.Investors that are seeking exposure to this region should consider the iShares MSCI Emerging Markets Asia ETF ($EEMA), while the iShares Asia 50 ETF ($AIA) is aimed at those focused on larger companies, with the product containingfifty of the biggest companies as classified by market capitalisation. 

The largest country exposure in emerging market ETFs tends to be to China, and investors have several options available in gaining access to the world’s second largest economy, through specialised ETFs. The SPDR S&P China ETF ($GXC) tracks companies traded on the Shanghai-Hong Kong or Shenzhen-Hong Kong exchanges. For those investors seeking to follow Chinese retail spending, the Global X MSCI China Consumer Discretionary ETF ($CHIQ) may be an ETF to consider, while other investors can access China’s tech industry through the Invesco China Technology ETF ($CQQQ). 

India’s rapid recent growth has also caught the attention of global investors. Investment exposure to around 85% of the country’s stock market, is available through the iShares MSCI India ETF ($INDA). The largest 50 firms in the Nifty 50 Index can be accessed through the iShares India 50 ETF ($INDY) or the First Trust India NIFTY 50 Equal Weight ETF ($NFTY) for investors concerned about the performances of specific companies. 

A few other single country ETF investment optionsare also available. In particular, investors wishing to gain exposure to the rapid growth to the Vietnamese market can access this through the VanEck Vietnam ETF ($VNM) or for those wishing to access South Korea’s growing stock market can do this via iShares MSCI South Korea ETF ($EWY). Latin America’s largest economy, Brazil, is another investment option, seen with the iShares MSCI Brazil ETF ($EWZ).

In comparing to the above, investors can also gain exposure to the greater region of Latin America through the iShares Latin America 40 ETF ($ILF). Another great option for keen investors is the VanEck Africa Index ETF ($AFK), which caters to investors looking to capture the potential growth of the world’s youngest continent, while the iShares MSCI South Africa ETF ($EZA) covers the country under a single financial product.


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