Emerging Markets Internet and Ecommerce ETF jumps on Chinese stock resilience

The Emerging Markets Internet and Ecommerce ETF has had a difficult start to the year as investors turn away from innovation stocks and rising inflation dents consumer confidence. Though the outlook is still uncertain for the tech industry, the fund has been helped by the lifting of restrictions in China at the end of last month.

While China’s lockdowns and the broader shift away from tech stocks have weighed on the Emerging Markets Internet and Ecommerce ETF [EMQQ] since the start of the year, the fund is up 21.4% from its 52-week low set in May (through 17 June).

The fund — which tracks companies in a range of segments including online retail, search engines, social networking, online video, e-payments, online gaming and online travel — benefitted from the general growth in internet and ecommerce activities in emerging markets in recent years as smartphone access expands and more and more people enter the middle class. As highlighted on the fund’s website, McKinsey describes this as “the biggest growth opportunity in the history of capitalism”.

Kevin Carter, the founder of EMQQ Global founder, believes the “internet sector in emerging markets is probably the biggest growth sector in the world today”. “There has been an average of over 35% annualised revenue growth for the sector. All of those billions of consumers are getting the smartphone and internet for the first time and because there is no Target store to go to, they are leapfrogging to digital consumption,” he told the Opto Sessions podcast.

China’s tech crackdown weighs on the EMQQ

While the Emerging Markets Internet and Ecommerce ETF benefitted from pandemic lockdowns and the ecommerce boom in 2020 and 2021, rising inflation and economic uncertainty has taken the growth momentum away from tech stocks and the fund has slumped 27.7% year-to-date through to 17 June. Fears of a global economic slowdown and supply chain squeezes in key electronics components such as semiconductors have also made investors more fearful.

However, given that half of the fund’s assets are weighed towards Chinese stocks, one of the main factors contributing to the EMQQ’s year-to-date slump is the Chinese government’s regulatory crackdown on tech companies. This has included a $2.8bn anti-trust fine for Alibaba [BABA] and sanctions on video game giant Tencent [TCEHY].

At the same time, tougher data laws and the US Securities and Exchange Commission threatening to delist a number of high-profile Chinese firms have also hurt investor sentiment.

The Chinese government’s zero-Covid lockdown policy has also hampered the economy and impacted production of electrical hardware and components. For example, Apple [AAPL] supplier Foxconn and Macbook manufacturer Quanta halted production in Shanghai in March and April, with the latter reporting a 40% fall in revenues in March due to the city’s Covid-19 lockdowns.

Can the EMQQ stage a revival?

Carter has described the EMQQ’s recent performance as a disaster, but believes that given that growth fundamentals are strong that the slide is based more on fear than fact.

“No regulators anywhere in the world have been able to keep up with tech stocks”, he said. “It is not a China thing because they are also under attack in Europe and the US. China is regulating but I think what they have done is smart and practical for their economy.”

The fund has reversed some of its losses since reaching a 52-week low of $25.55 on 12 May, helped by the easing of lockdowns and more conciliatory language from the Chinese government on the tech sector.

Louis-Vincent Gave, chief economist at investment advisor Evergreen Gavekal, wrote in a research note on 10 June: “Top-level rhetoric seems to be softening on internet companies, a boon for the embattled sector and Chinese equities in general.”

Improved outlook for holdings Alibaba and Meituan

The Emerging Markets Internet and Ecommerce ETF, which was launched in 2014, has a year-to-date daily total return of -28.7% and total assets of $625.1m as of 17 June. Around 53% of its holdings are in China, followed by 12% in India and 9.5% in South Korea. The fund’s largest holding is Chinese online shopping platform Meituan [3690.HK] with 10.9%, followed by Tencent (8.8%), Alibaba (8.5%) and JD.com [JD] (8.2%).

The Meituan share price has dropped 11.7% since the start of the year through to 17 June, but it has climbed 92.4% since its 52-week low on 12 March, helped by the growth of its food delivery business. Alibaba’s share price has also risen 34% over the same period, boosted by the announcement of its $25bn share buyback programme — the largest ever buyback undertaken by a Chinese tech stock.

The news that China’s central bank accepted Ant Group’s financial holding company application also helped improve investor sentiment, as Alibaba partly owns the firm. These positive developments could revive listing hopes, which had been torpedoed during the regulatory crackdown. Alibaba’s name also appears on Morningstar’s list of equities that are currently undervalued but hold strong competitive advantages. It stated that Alibaba and JD.com both trade 51% below their fair value estimates.