The metaverse: A new reality beckons for emerging market equities

The metaverse arguably entered the mainstream when Facebook renamed itself Meta in October last year and the volume of worldwide Google searches for the term exploded. In January this year, Microsoft added to the excitement by announcing the $75 billion acquisition of games developer Activision Blizzard. And in May, Google acquired Raxium, a start-up whose MicroLED display technologies could enable better virtual reality headsets.

Perspectives on what the metaverse actually means vary, but it could be summarized as a variety of digital platforms, experiences and services that may converge into an integrated, interconnected whole.

However you choose to define the metaverse, though, it is clear that Big Tech is making big bets on the sector. Why? Because socializing, gaming, browsing, buying, travelling and a wide spectrum of other human activities are becoming digitized in new and increasingly immersive and interactive ways.

So in the same way that online streaming killed CD and DVD sales, and e-commerce continues to erode market share for physical stores, the metaverse could take the digital disruption of existing business models to a new level. Not surprisingly, then, analysts and investors are keeping a close watch on the opportunities this disruption may create.

“An $8.3 trillion opportunity” is how Morgan Stanley describes the process of moving just advertising and e-commerce transactions into the metaverse, in the US alone. Extending that migration to other areas of consumption, such as games, autos or real estate, could imply “another $5 trillion in consumer spending,” according to the investment bank.

Building the kind of immersive experiences that underpin the metaverse is also going to take considerable hardware and software. That means potential growth and revenue for semiconductor firms, device makers and innovative software developers globally.

A whole ecosystem of industries could benefit from metaverse adoption, including names in entertainment, payments, video games, cloud computing, telecom and network infrastructure, augmented and virtual reality (hardware and software), PCs and smartphones. Blockchain and cryptocurrency firms will also be key supporters, as they create infrastructure for a new generation of ‘interoperable’ platforms that allows for digital assets to move between them. And all that is before next-generation technologies like artificial intelligence or remote medical care are incorporated into market forecasts.

Meta-mergence

These virtual environments, where social and economic elements converge to replicate reality, generate a lot of media headlines but tech analysts expect building out the platforms and drawing in a critical mass of users could take a decade or more. In that time, significant experimentation from established companies and new ventures from potentially market-leading names that don’t even exist yet will likely change the commercial landscape of the metaverse.

So investors interested in this emerging domain have time to do their research, but the implications of the metaverse are transformative: companies that offer compelling immersive experiences to consumers are not likely to stay under the radar for long.

In terms of investment, Bloomberg Intelligence has studied how retail investors can already leverage the metaverse theme through related exchange-traded funds, which it estimates could “balloon to $80 billion in assets under management by 2024.” ETFs are only one way for investors to access what Bloomberg estimates to be a US$800 billion market for digital worlds by 2024.

The leapfrog effect, where consumers in less developed markets get ahead of developed ones because they can bypass legacy systems and entrenched stakeholders, is another metaverse dynamic to watch. Markets such as China and India could emerge as leaders in the adoption of this form of extended reality.

A World Economic Forum survey, conducted by Ipsos, finds more positive sentiment about engaging with the metaverse in daily life in China and India, as well as South Korea, than it does in Japan, the UK or the US. Large, and largely growing, consumer markets in Asia could prove pivotal in metaverse development, both from the standpoint of critical mass supporting digital worlds and the products or services accessible in them.

Meta growth

Digital disruption has already opened a playbook for investors. Shares in online retailer Amazon have grown over 100,000% since 1997, even with the recent drop in equity markets. A similar story could be about to roll out with the metaverse and, while risks are equally present, long-term equity shareholders may have a distinct advantage; they can leverage existing holdings to access liquidity and invest in a range of new ventures.

In a rapidly digitizing world, securities-based financing can be a quick and straightforward source of capital for entrepreneurs looking to invest in virtual worlds or extended consumer engagement, either through taking new equity positions or financing their own metaverse interests, such as buying digital land for their business on a popular platform. The metaverse may be a new frontier, but the importance of this fast, flexible and dependable source of capital will not change.

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