Christian Magoon, CEO of Amplify ETFs, joins Opto Sessions to discuss the growth of fintech as an industry, and the reasons why emerging markets (EMs) are well-placed to capitalise on it. He also explains how Amplify’s Emerging Markets FinTech ETF captures this.
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Christian Magoon is the CEO of Amplify ETFs, an ETF provider offering funds aimed at investors seeking growth, income and risk-managed strategies. He previously founded ETF sponsor YieldShares, and prior to that worked in ETF product management for Claymore Securities and as a Senior Vice President at First Trust. All in, he has over 25 years’ experience working with ETFs.
Magoon highlights the growth that the fintech space has seen in recent decades, starting from the transformative impact that computers have had on finance from the outset.
Computers were “revolutionary in banking, payments and investing”, he tells Opto Sessions. “A lot of that used to be done by hand and book or on paper.”
Digitalisation has enabled what Magoon calls the “fintech revolution”. This has removed the need for customers to enter physical banks in order to access basic financial services like transferring funds or investing in stocks.
“The biggest inflection point has been the smartphone,” says Magoon. “We do so many transactions over that smartphone.”
These benefits are not limited to traditional financial services. The exchange of digital assets is, according to Magoon, another rich avenue of potential growth for fintech companies.
“The biggest inflection point has been the smartphone.”
Now, he tells Opto Sessions, newer technologies like artificial intelligence and machine learning are a further source of tailwinds for the theme. In time, such technologies will move fintech beyond being simple tools and begin to offer users “smart advice”, such as on how to optimise the way money is spent and invested.
Modern fintech apps “are able to do things much more quickly than physically going into a bank. For example, getting a loan: some of these lending apps may give you a decision on a loan within two hours after you submit the application. Some of us can remember the days when you might have had to wait a week or two to hear back from a bank for credit.”
The Emergent Fintech Revolution
Alongside other EMs, India is at the forefront of the fintech revolution. “India skipped a lot of the technological steps that we went through in the West and went straight to smartphones,” says Magoon.
Banking penetration has historically been lower in EMs, where today “more people have smartphones than have bank accounts”.
Amplify’s Emerging Markets FinTech ETF [EMFQ] tracks the EQM Emerging Markets Fintech Index, which holds stocks that generate at least 50% of their revenue from fintech services in a selection of nearly 20 Ems, with each individual country’s weighting capped at 25%. The EQM Emerging Markets Fintech Index is calibrated four times per year.
These countries share several tailwinds as far as the theme is concerned. Compared to developed markets, for example, most have younger populations that have grown up with smartphones.
“Also, if you look at the governments of these EMs, they want to see their citizenry increase their affinity towards investing and banking. It doesn't benefit these governments to have a cash society, which is what most of these countries previously had prior to fintech. Cash is hard to account for, and it creates a lot of issues, including, potentially, corruption.” By contrast, moving money around using fintech platforms allows for greater accountability and visibility.
Additionally, living standards are rising rapidly in EMs. The easiest path for the growing middle class is, Magoon says, to use smartphone apps to pay for goods and services.
“So many people in these countries have gone from not having the luxury of investing, opening a bank account or having the ability to apply for a loan to now having a high enough standard of living that they are able to do these things.”
The US Dollar’s Impact on EMs
Stocks from EM nations, Magoon says, typically experience greater volatility, though over the long term they tend to outperform developed markets — much in the same way that low-cap stocks, while more volatile than large-caps, tend to generate greater returns over a similar horizon.
Another source of volatility involved in investing in EMs is their high degree of exposure to fluctuations in the US dollar.
“A strong dollar hurts EMs, and a weak dollar helps them out,” says Magoon. “That’s part of the diversification you get in your portfolio by including EMs.”
Magoon thinks the dollar will weaken over the next three to five years and cites recent events such as ratings agency Fitch’s downgrading of the US’ long-term credit rating to AA+ from AAA or recent political wrangling over the country’s debt ceiling.
“A strong dollar hurts EMs, and a weak dollar helps them out.”
“There’s so much debt that the US has. One way to minimise that debt is to have a weaker dollar.”
Over the past 10 years, Magoon says, EMs have struggled to generate alpha over US markets, but the headwinds facing the dollar could change this dynamic. He feels especially confident that US equities are approaching a peak.
EM outperformance has historically come “during a time when the dollar is weaker, or when US valuations peak and EM valuations are just so low that they become more attractive.
“I think both those dynamics are in play right now.”
On the other hand, Chinese weakness could hinder EM funds and indices. “EMs do have a fair amount of Chinese exposure. The Chinese economy has been stumbling a little bit. Even today, in the middle of August, we're hearing some concerns over their banking system and some of the property transactions surrounding it.”
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