Investing in emerging market stocks is essential for building a well-diversified global investment portfolio. In fact, according to Morgan Stanley, an ideal global equity portfolio should have at least 13% allocated to emerging markets.
But emerging market stocks have lagged behind the broad market so far this year. Much of the underperformance is attributed to non-company-specific factors such as COVID-19 resurgences, supply chain disruptions, slowing global growth, and rising inflation. But as investors take a bearish view of the entire sector, many fundamentally strong stocks with significant competitive advantages and improving financials are now trading at attractive valuation levels.
MercadoLibre (NASDAQ:MELI) and Pinduoduo (NASDAQ:PDD) are two such international companies that offer investors exposure to fast-growing markets at attractive price points.
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1. MercadoLibre
As an e-commerce and fintech leader in Latin America, MercadoLibre is well-positioned to benefit from the explosive growth potential in this region. Referred to as the “Amazon of Latin America,” the company has built an integrated ecosystem comprised of an online marketplace, the Mercado Pago payments platform, a logistics service, advertising services, and online storefront solutions. The company has a presence in 18 countries, most of which have fragmented e-commerce and fintech markets.
The company’s scale and the self-managed Mercado Envios logistics network (which enables cross-border transactions and deliveries to underdeveloped regions) have enabled it to compete effectively against smaller players in these emerging markets.
According to Morgan Stanley estimates, the e-commerce market opportunity in Latin America is expected to grow from $50 billion in 2020 to $160 billion in 2025. However, despite the market growing at 21% annually from 2019 through 2025, e-commerce penetration in Latin America will rise from just 5% to 16% over the same period. This leaves much room for a dominant player like MercadoLibre with an established logistics and fulfillment infrastructure to expand in the coming years.
MercadoLibre’s fintech platform, Mercado Pago, could prove to be an even bigger opportunity. With customers using Mercado Pago to process digital payments on the marketplace and off the platform, it is helping boost e-commerce transactions while also creating a sticky customer base. Mercado Pago is also used extensively for peer-to-peer transactions, retail investing, and even for paying bills in Latin America.
The company’s credit services (offered to merchants and customers) are backed by proprietary credit risk models using unique data about borrower behavior from its online marketplace. This has helped to significantly reduce the default risk.
All these strategic moves have translated into robust growth in gross merchandise value (GMV) on the company’s marketplace and total payment volume (TPV) on…