Domestic Emerging Markets: A new asset class

Qualified Opportunity Zones
Domestic emerging markets offer similar upsides to traditional emerging markets with much less complexity and, in many cases, fewer risks on an apples-to-apples basis.

Domestic emerging markets is a new asset class created under the Tax Cut and Jobs Act through the Qualified Opportunity Zone investment incentive.Essentially, the Qualified Opportunity Zones investment incentive promotes domestic emerging markets through three tax and incentives that I've outlined here. Since at least 2000, and almost certainly longer, economic growth and new business formation in the U.S. has been concentrated in a few states.  For instance 80 percent of venture capital investments get made in three states: New York, California, and Massachusetts.  Even more remarkable is that the concentration has been in about 20 zip codes.

Chart 1:  Changes in Employment[1]

Chart 2: Changes in Business Establishments[2]

bantam inc qualified opportunity zone emerging markets jack duval - employment chart

Once you get out of the 20 zip codes that are creating businesses and jobs, the picture becomes bleak.  Most other zip codes are either just hanging on, or in a state of distress.

Domestic Emerging Markets: A new asset class

From an investment perspective, the distressed zip codes represent the new asset class of domestic emerging markets.

Chart 3: Non-Correlation of Employment[3]

bantam inc jack duval qualified opportunity zone domestic emerging markets correlation chart

They have been truly non-correlated to the rest of the U.S. and have declined while the rest of the country prospered.With the Qualified Opportunity Zone incentive, these domestic emerging markets have essentially opened their borders to investment.Comparing them to traditional emerging markets reveals many advantages, including:

•  Dollar denomination of investments;

•  English speaking work force;

•  Established infrastructure;

•  Adjacency to developed markets;

•  Underserved consumers;

•  Large supply of labor;

•  Ease of business formation and doing business;

•  No political risk;

•  Strong legal framework;

•  Strong regulation, and;

•  Strong accounting standards.

While asset managers are always on the hunt for non-correlated asset classes, this one has existed under their noses with almost no notice.Essentially, Qualified Opportunity Zones have almost all the hallmarks of traditional emerging markets, including:

•  Low per-capital income;

•  Higher unemployment;

•  Lower levels of business and industrial activity.

What they have not had is:

•  High inflows of investment capital;

•  Rapid growth.

The Opportunity of Qualified Opportunity Zone Investments

Qualified Opportunity Zone investments allow individuals and institutions to invest in the domestic emerging market asset class at a time when virtually all other asset classes are inflated and at or near all-time highs.Traditional emerging markets investors should leap at Qualified Opportunity Zone investments.  They offer similar upsides with much less complexity and, in many cases, fewer risks on an apples-to-apples basis.Although many investors will immediately think of real estate opportunities (which certainly exist), the real leverage exists in equity investments.  I will discuss the leverage available in equity investments in my next post in this series.Bantam consults with individuals and institutions looking to make Qualified Opportunity Zone investments and to measure their impact.  To learn more about our Qualified Opportunity Zone investment services and expert Jack Duval, see this.

[1] Escape Velocity; Economic Innovation Group; May 2018; Available at:; Accessed August 2, 2018; 11.

[2] Id. at 13.

[3] Id. at 24.

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