Episode #499: Kevin Carter, EMQQ Global – India is Happening NOW
Guest: Kevin Carter is the Founder & Chief Investment Officer of EMQQ Global. While he principally considers himself an active “value” investor, he has collaborated with Princeton economist and indexing legend, Dr. Burton G. Malkiel, for more than 20 years.
Date Recorded: 8/30/2023 | Run-Time: 55:41
Summary: In today’s episode, Kevin pounds the table for India’s tech sector. He covers the demographic trends, The India Stack, the difference from China 15 years ago and the current valuations. He also explains why environmental risks are something to keep an eye on in India.
Listen to Kevin’s Kevin’s first appearance on the podcast.
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Links from the Episode:
- 1:13 – Welcome back Kevin to the show; Episode #187: Kevin Carter,
- 1:35 – Lessons learned from gambling
- 4:18 – Emerging markets and issues with the MSCI index
- 13:52 – The demographic shifts fueling India’s booming digital economy INQQ ETF
- 18:01 – India’s tech stack
- 22:17 – API-driven digital infrastructure for a paperless, cashless, and presence-less society; India Stack; UPI; GEO; ONDC;
- 33:00 – India’s digital platform sparks both optimism & privacy concerns
- 37:32 – Emerging markets investment opportunities and challenges
- 44:15 – Global CAPE ratios from Barclays
- 45:03 – Reflecting on experiences in South Asia
- 49:16 – Shantaram by Gregory David Roberts; The White Tiger by Aravind Adiga;
- 49:39 – India’s potential risks
- Learn more about Kevin: EMQQ Global; LinkedIn
Transcript:
Welcome Message:
Welcome to The Meb Faber Show, where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas, all to help you grow wealthier and wiser. Better investing starts here.
Disclaimer:
Meb Faber is the Co-Founder and Chief Investment Officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com.
Meb:
What’s up, everybody? We got a super fun show today. We’re crossing some borders with our returning guest, Kevin Carter, Founder and CIO of EMQQ Global. In today’s episode, Kevin pounds the table for India’s tech sector. He covers the demographic trends, the India tech stack, comparisons to China 15 years ago in the current Indian stock valuations. He also explains why environmental risks are something to keep an eye on in India. Check out the link in the show notes for Kevin’s first appearance on the show, which is a great listen before this episode. Please enjoy this episode with Kevin Carter.
Kevin, my friend. Welcome back to the show.
Kevin:
Thanks, Meb. Good to be back.
Meb:
Where do we find you today?
Kevin:
I’m in Lafayette, California, 15 miles east of San Francisco.
Meb:
One of our mutual favorite destinations on the planet, Lake Tahoe. When’s your next trip up there, man?
Kevin:
I’ll be going up this weekend.
Meb:
Last time we talked to you and, listeners, I would actually highly recommend to listen to the first episode with Kevin because we go into his background, which is pretty interesting. We talk a lot about China and it’s a pretty good part one to this episode. So we’ll put it in the show note links, maybe we’ll publish it in the feed again just to have both there. We’re going to hit on a different topic today, but in the meantime, we had one of your partners and mentors over the year on the podcast, Burton Malkiel, who listeners will certainly know that name. We were joking because we said, “Burton, give us a little something to ask Kevin on the show,” and he says, “Did you know when we were traveling around the emerging markets, Kevin’s a bit of a card player.” So I always say, what does that mean? Is that Bridge, Blackjack? Are you a craps gambler? What’s the story? You just doing your own due diligence in Macau?
Kevin:
That’s funny. I have been to Macau. It’s hard to find a Blackjack table at Macau and Blackjack’s the game I like to play, but Burton and I, Burton likes Blackjack and he plays by the rules. He’s got his rules. I don’t know if you asked him for his rules, but he’ll give him to you. I can’t remember what they are exactly. I don’t play by those rules. I play a little bit more by gut with some math as well, but yes, we’re in Australia together for some presentations about China and we played at the Star Casino in Sydney is where Burton taught me his rules of Blackjack. I think we both walked out with the same amount of money, but mine was a little bit more volatile.
Meb:
I think every young person goes through a moment in time where there’s this attraction to this concept of the Martin Gale, and very quickly you learn a lot about bet sizing as a gambler, wherein, listeners, if you don’t know the Martin Gale, it’s essentially you double down every time you lose. Theoretically, if you have an infinite bankroll, you’ll never lose because eventually you’ll win. The problem comes, you learn a very quick lesson and the power of exponentials because very quickly if you lose five 10 in a row, the bet size gets more than any bankroll anyone will ever have, but think that’s a fun lesson. Gambling, as long as you don’t go broke and even then it can be a good lesson. There’s so many good lessons in thinking about position sizing and how to play and odds.
Kevin:
That’s right. Similar to short selling, where you have 100% upside and unlimited downside and your bet gets bigger as it goes, unlike a long position which gets smaller, it gets bigger.
Meb:
One of my all-time early favorite podcast guests was the godfather of Blackjack card counting, Ed Thorpe. Also one of the best performing hedge fund managers of all time, who the original beat the dealer and beat the market books. Listeners, you can go find an old copy. They’re certainly classics. Well, let’s talk about emerging markets. Like many cycles, this cycle feels, like in the stock markets, they’re continuing to emerge. I think as a percentage of world market cap, we’re in the low teens, but when I talked to advisors over the past number of years, and Goldman has come up with some stats on this, I think the average allocation sits down around 2% or 3% as a percentage of their stock portfolio. So big underweight. Talk to me a little bit about how you see them broadly and then we’ll start to dial in more specifically to one country in particular.
Kevin:
I tell people there’s really two things to know about investing in the emerging markets. The first is that the thing that is emerging are the people. You’ve got six and a half billion people and they’re moving up. They’re emerging and they want stuff. They want more and better food, more and better clothing. They want appliances. They want to go to movies and take vacations and they want a vehicle, and they want their kids to go to Harvard, and that’s the most important thing, and that’s a very long one-directional secular trend that has been very well-documented. So if you’re investing in emerging markets, it’s my belief that that is what you should be trying to capture.
The second thing about emerging markets is that there’s a big problem, and the problem is the index itself. The MSCI index, which we use to track the performance of emerging markets, has a lot of problems. The first and biggest problem, which I encountered my first five minutes into being part of emerging markets 18 years ago, is that the emerging markets have a lot of these government-owned banks and oil company, these state-owned enterprises that are inefficient, they have conflicts of interest with you as an investor, and the governance isn’t very good, and the corruption is everywhere.
So what you find, and I got pulled into China 18 years ago, thanks to Burton, the first thing I did was I asked for a list of all the companies in the China ETF because we had these investors that were interested in investing in China after hearing Burton talk about China. I assumed we would use the ETF that iShares had. There was only one China ETF back then. It was the FXI, but since I’m an Omaha person, I wanted to see what were the companies. I don’t care about the name of the ETF, I want to know what are the businesses we’re going to own.
So I asked for that list and that’s when Burton pulled me aside and explained to me that 80% of the index was government-owned banks and oil companies and how the government-owned banks would make loans to companies that were already bankrupt, basically, to keep the employees paid. So that’s a big problem and I don’t have a solution for it. A lot of investors have given up on emerging markets and they have very small allocations because they’ve had a lot of promise for a long time, but no one’s really got any real return from investing there.
In fact, I think the 12 or 13 year return is about 25%. I know that for the 10 years ended with 2022, the earnings growth was negative. So in Omaha, investing is really simple. The reason businesses have value is because they make profits for the owners. The only way to make the value go up is to make the profits go up, and that hasn’t happened in the traditional indexes, which are, again, full of banks and oil companies and mineral companies that are state-owned and not really for-profit in a traditional sense.
Meb:
We spend a lot of time probably way too much for this to be healthy and beneficial to our download statistics, but we spend a lot of time talking about market cap investing and how it is an interesting and good first step, and it enabled some things in the ’70s, but as far as an investing methodology can become quite suboptimal given some conditions, particularly times when things go totally bananas.
The interesting part that I feel like is one of the biggest dislocations for me when talking about emerging markets because I love my polls on Twitter, and we’ll ask people what percentage of world GDP is emerging markets, and almost everyone says zero to 20%, 20% to 40%. We both know that that’s totally wrong. Emerging markets end up being most of world GDP, which surprises so many people. Then looking on all the various statistics, like when we were talking about Macau earlier and you Google Macau Casino annual revenue and Vegas annual revenue, very quickly people would be surprised that Macau is multiples of Las Vegas already. So just the scale of emerging markets is really staggering, particularly for most people who have never done any traveling, which is, of course, many, if not most.
So you and I sat down to dinner and in retrospect, we probably should have gone to an Indian restaurant. There’s some good ones around here as opposed to the one we went to, which was good, but you were very excited and animated, which is your natural state, but give me the lead in. What was the initial attractant to what you see as a pretty big opportunity here?
Kevin:
Well, nine years ago, first identified was the fact that all of those billions of consumers in emerging markets we’re going to get their first ever computer in form of an Android-based smartphone, and that once they had those pocket-sized supercomputers, they were going to get on the internet, and that because they didn’t have bank accounts and they didn’t have automobiles and there was no target stores, that they would leapfrog and become digital consumers, and because we’ve had such an evolutionary experience with information and with technology, we don’t realize that not everybody else in the world has traveled that path as we have.
So all of a sudden, what I was seeing was that all of these billions of consumers were going online and getting their first bank account, but it wasn’t a traditional bank account. It was a smartphone-based place to keep your money and make payments. Again, I first saw that in China. That started happening in China. As you may know, I launched a number of China ETFs with Guggenheim, but we launched a China technology ETF, CQQQ, probably 13 years ago to capture that story, the online consumer.
Then I saw that it was evolving and it wasn’t just China, it was Mercado Libre, which went public out of South America. That was the amazon.com of Brazil and Mexico. Now, what we see is that since this story started in China, China’s e-commerce market, it’s the largest in the world by far. So China is an emerging market in a traditional sense, but in terms of the digitization story and e-commerce, China’s the most developed country in the world by far.
So what we started to see was that while there’s the other 45 emerging markets, they are basically where China was 15 years ago. So if you think about consumers and the internet and personal computers, that basically started in the United States in the year 2000. When could you really have a computer at your house, get on the internet and do some business on the internet? That basically started in the year 2000, and we saw this 15-year S-curve as the FANG stocks took over our lives and our stock market.
The China wave, the second wave was basically right behind us, 2005 to 2020, Alibaba and Tencent leading the way, and now what’s coming is the third wave, and this is the other five and a half billion people that are not in China, and India is the biggest part of the story and South Asia, if you include Pakistan and Bangladesh to the west and east, this is almost two billion people and about 850 million Gen Z. So this is the most fertile ground for this story going forward.
India stands alone in my mind right now not only as the biggest opportunity in emerging markets, but maybe the best opportunity in emerging markets in terms of a single country that we’ve seen, and it’s because of a number of reasons that have just lined up and they’re lined up at a time when you can now get a $12 smartphone brand new in India. When I saw you for dinner a few months ago, I would tell you you could get a $50 smartphone brand new in India. This is an Android-based smartphone, but just seven weeks ago, Reliance Jio introduced a $12 smartphone, a $12 supercomputer. So whereas China when they got online, they were on PCs and they, like us, migrated onto the smartphone, well, these people are skipping the PC altogether and the India story is just incredibly compelling.
Meb:
Let’s dig in. So you have the obvious demographic. I feel like most investors can appreciate that. You just mentioned there’s multiples more Gen Z than there are Americans in total, just the scale of the amount of people, the density. I’ve never been to India. I really want to go, so you can help be my tour guide, but tell me a little bit about what the macro picture. Walk down what took you from, “Okay. This is curious and interesting,” to, “Okay. This is actually really interesting.”
Kevin:
Meb, three years ago, we only had one half of 1% of EMQQ within India, and we only had three publicly traded companies, but what I saw was that there was dozens of unicorns that were lined up to IPO. So I’d originally planned to go to India in the spring of 2020, but then the COVID came and I was unable to go, but the IPOs happened. There were 23 Indian internet IPOs in the first 18 months of the COVID, but all of them went public in India, so they didn’t get much coverage here. What was given me incredible amount of conviction is the last nine months. I’ve basically devoted all of the last nine months to a deep, deep dive into all things India, including the internet opportunity there, the digital opportunity that we have tapped into. As you know, we launched INQQ, the India-only product last year as soon as there was enough companies. So once there was over 20 companies enough to make a diversified portfolio is when we registered and launched.
So the story for India, which, by the way, this is not a secret. Almost every major investment firm has some report outlining the bullish part of the India story, but there’s basically eight bullet points. First, it’s now the largest country in the world. It passed China in April according to World Bank, so 1.4 billion people in India. If you look at the chart as it goes out, it’s going to get bigger and bigger than China because it’s young. It has the youngest economy, a major economy. They’re about 11 and a half years younger on average than China. So you’ve got 600 million people that are just getting into their early part of their prime. You have the fastest growing major economy. Most of that growth is coming in a swelling middle class that will in fact pass China and have more consumption within a decade by most estimates, and you’ve got the fastest growing e-commerce market. India’s growing just a little faster than Brazil, about 28% a year.
Finally, and this is the part that I didn’t appreciate completely until recently, India has a government that’s a democracy, which a lot of people favor, and it is a democracy that is led by a government that has basically gone all in on digitization. Modi, who’s been the leader for the last decade, his whole platform is Digital India. So I knew that they had done a number of initiatives to help the digitization of the country, but I had no idea how well-developed these systems and this digital public infrastructure had become, which is an abstract thing, which I hope we go into in detail. So you have all those basic things, big, young, just the checklist, and it’s hard to, with words or pictures or numbers, to explain the scale of this opportunity, the sheer number of humans, the density.
Meb:
Well, you have an actual pretty good chart and some of the stats we’ve talked about earlier I think hit home, but you have a good chart that we’ll put in the show notes on Bangladesh, but you said the size of Bangladesh and then if half of the US moved to Illinois is the population of Bangladesh, which just puts it in perspective, the density.
Kevin:
No, it’s staggering. There’s 170 million people and it’s the size of Illinois. Also, a third of its always flooded. So it’s basically two-thirds the size of Illinois. You’d have to take the third through ninth largest countries and combine them to get to the size of India. It’s very, very young, it’s very dense, and it’s pretty chaotic. Unlike China, which is homogenous, 95% Han Chinese, India has got 1600 different languages and 24 of them the government publishes every document in. So there’s 1,580 languages that aren’t even recognized officially. So it’s incredibly diverse and it’s very dense.
The other thing that India has going forward now also is infrastructure. When I got involved with China 18 years ago, it was basically tied with India. It was a little bit ahead of India in terms of its GDP per capita, but not very far, but what you could see was China had begun this massive infrastructure investment to build the world’s best infrastructure, high-speed rail, airports, highways, high-speed trains, and seaports to load up the manufactured products and get them on a boat.
While they were doing this, India was mired in bureaucracy and basically sat on its hands and didn’t really invest in its infrastructure, and China blasted ahead and basically quadrupled the size of their economy. Plus in that period, well, India didn’t really get moving and the bureaucracy that the British left India or I think largely to blame.
Well, right now, Modi is the leader of India, and he’s been the leader for the last 10 years. So he’s finishing up his second five-year term. He will almost certainly get another five-year term when they vote next year and a fourth term if he wants it. There’s no term limits. He’s loved. He’s got an 80% approval rating. Not everyone likes him, but the vast majority do, and he has got the government organized and efficient and very business-like, and that includes the infrastructure investments. So all of the infrastructure numbers have exploded under Modi in the last 10 years. They’re currently in the middle of a trillion and a half dollar comprehensive infrastructure plan that involves modernizing the pretty extensive rail network they have, electrifying it, adding hundreds of new stations, modernizing the stations. They’re building their own high-speed trains now. They’ll deliver 400 of those trains in the next several years connecting the cities, obviously, with the high speed rail.
The Indian air travel market’s going to explode. That’s one of the early luxury spends of people as they move up the consumer ladder, they want to go see the sites of their own country. So the domestic air travel market will explode in India. It’s already exploding. The airports are going to triple by the end of 2025. So all parts of the infrastructure now are catching up. Back 17, 18 years ago, they had problems with the power grid to the factories and they had brownouts and so forth. They fixed most of that and they’re making big investments.
Now, a lot of this has to do with this China plus one strategy, trying to find alternative supply chains and alternative suppliers so everyone’s not totally dependent on China, and that’s probably a practical thing to want to do anyhow, but the reality is China’s got the best infrastructure and they’re able to make the best products, get them on a boat better than anybody, and it’s the port capacity that’s going to be a bottleneck because China’s port capacity is 10 times India’s, and it apparently takes a long time to build a port.
So you’ll see manufacturing jobs go to India. Apple’s going to make a quarter of their iPhones, the latest iPhones, by the end of 2025 by estimates. So the infrastructure is finally there and they’re really taking it seriously and it shows, and it does look and feel like Shanghai and China did when I first went there 17 years ago.
Now, here’s the third part of this setup that India has, and this is the part that I alluded to earlier that is it’s unique in the world, no other country developed or emerging has this, and it’s what they call the digital public infrastructure or the India Stack. Most of the components of this digital public infrastructure while abstract to me, I knew what they were, but I didn’t quite appreciate how they had evolved and developed. It started in 2009 when the Indian government had decided it was finally time to create a national identity card so that everybody in the country would have a unique 12-digit number on a card given officially from the government because one of the problems they were having with developing was that nobody had identification. Very few people had driver’s licenses or passports or any form of official government identification. As you can imagine, it’s hard to develop your economy where nobody can prove who they are.
They asked the chairman of Infosys, Nandan Nilekani, if he would be in charge. Mr. Nilekani said, “Look, I’ll be in charge of this, but if we’re going to do this, I’m going to use a lot of technology because,” as he said, “I didn’t see as much technology as I would’ve expected when I helped the people in Bangalore, and now if I’m going to do this, we’re not only going to use the best technology of today, but we’re going to look to the future, and not only will we give everybody a card, everybody will also have their 12-digit number linked to their eyeball scan and fingerprints.” So every number has a human being tied to it, biometric data.
Now, when they launched it in 2010, it was totally voluntary. You didn’t have to sign up. So I knew about this program. I had the logo in my presentation. It’s the national identity number. That’s going to be good for the economy, but I didn’t quite follow its development. Then about three years later, they put another layer onto the stack. So the Foundation Aadhaar, then they put a KYC, know your customer, layer on top. With this program, they started initiatives so that you could go into any bank. If you were in the Aadhaar system, you could walk into a bank and open a bank account in three minutes with no paperwork just by putting your fingers on a pad and looking into the camera.
In 2016, they launched this other initiative, the Unified Payments Interface or UPI. Again, this got a lot of coverage. It was part of Digital India. I put the logo in my presentation about India, but I didn’t really follow the development, but the headline of the UPI was that it would allow instantaneous, completely free transfer of money from any person to any other person or business, no delay, no friction. I could send you $10, you could send it back to me. We could do it 20,000 times, it would still be $10.
So I said, “Okay.” Well, but to be totally honest, the main thing I felt about that program was a concern because one of our companies that we talked about, it hadn’t gone public yet, but it was the Indian Payments Leader, Paytm, which I started featuring in my presentation after Berkshire Hathaway invested in the company about eight years ago and it was still private.
The next part of this is not part of the digital public infrastructure, but it effectively acts like it, and this was sort of the Big bang moment. This is a private enterprise called Jio or the Jio Network. This is the largest phone carrier, the mobile phone subscriptions. Jio is part of Reliance Industries. What happened, the same year that the UPI was introduced, Mukesh Ambani, who runs Reliance Industries, had made a very decisive decision that Jio needed to go all digital and that Reliance needed to go big on the digitization of India’s story, and their first and very bold move was to buy the only 4G license, the only 4G spectrum in the country, and invest $25 billion to build a countrywide state-of-the-art 4G network that was also contemplated 5G and 6G coming down the line.
Now, at the time, there was about a dozen other carriers and all of them were on 2G, and they were all locked in a price war, and their balance sheets were terrible and they couldn’t even invest to keep their 2G running very well. So Jio comes in and then they launched in the November of 2006, same year as the UPI, and their pitch is pretty simple, “We have the only 4G network. If you sign up with us, we’re going to give you free voice calls forever, unlimited, and we’ll give you six months of free data, and then after your six months is over of free data, we’ll still be the only 4G network and we’ll also have the lowest prices.” So that was their offer.
Then the goal that Mukesh put forward was that they would sign up a hundred million people by the end of the next year, so by the end of 2017, and that was a pretty bold goal. It was especially bold because back then if you wanted to get a new mobile phone, it took about three hours on average when you went to the phone store because you would, again, have to prove who you were and they would have to verify you manually.
When Reliance Jio launched, they used the Aadhaar system because it’s open for people to use, and in their stores, they had basically the eyeball reader and the fingerprint reader, and they opened a hundred million accounts in four months, an average turn time of five minutes down from three hours. So this was the first time the commercial power of this India Stack really made itself visible.
So now if you fast forward to today and what’s happened in the last three and a half years because COVID accelerated as more than anybody, any other country, that mobile payments have exploded, that UPI platform now accounts for 40% of the world’s real-time instant money transfers, and the slope of the curve is still at 45%, 50% growth. What has happened in addition to that is the government also took out the high denomination bills and they simplified the tax code.
So seven years ago, the Indian economy was 95% cash-based, paper-based cash. Now, it’s 75% digital. So it went from 4.5% digital to 75% digital. Again, the payments numbers have exploded. The tax revenues to the government have exploded because everyone’s now in the proper financial system not dodging taxes and working off of cash. So you’ve taken what would’ve taken 60 years in the old world to modernize their financial system, and they’ve done it in seven years.
So this India Stack, nobody else on the planet has this, and interestingly now, Nandan Nilekani, the leader of all of this, he’s now offering it up to other countries. In fact, several countries have signed up to take a copy of the UPI, including France. Aadhaar will probably be a little harder to sell people because of the privacy, but anyhow, this digital stack is a secret weapon and people I don’t think appreciate it and understand it because I didn’t understand it or appreciate it until recently and it’s not done.
The other important element to India is you say, “Okay. Well, if you’re going to have e-commerce, what is the current commerce? Where are people getting their stuff today?” In South Asia, in India specifically, they get their stuff from 13 million mom and pop stores. So 90% of all consumer spending happens in these little like a bodega in New York City. It’s a small shop that has 200 items of what you need every day. Again, there’s 13 million of these stores and they’re more formal retail. Big box stores have been introduced, but they’ve not been able to take very much market share.
So what I think India is going to end up with is a hybrid, where the kirana stores are going to become digitized. It’s already happening. In fact, Paytm, who I referenced earlier, it really has a stronghold in those merchant markets. Paytm’s found a way to make money. They make loan now, they become the banker for the kirana store owners and make loans. So, I think what you’re going to end up with is a highly digital mom and pop, hyperlocal e-commerce, and there’s a new layer to the stack to drive this. It’s called the ONDC, and this is the latest, again, led by Nandan Nilekani.
The ONDC is the Open Network for Digital Commerce. It’s designed to help further integrate those mom and pops into the country’s e-commerce. I can’t explain it well, and I don’t think if you … There’s a great Morgan Stanley interview with this man, Nandan Nilekani. It’s a 12-minute interview where he talks about all of these things from the beginning and then looks forward to what’s coming down the pipe, but he says that this particular new program might be the most powerful thing that they’ve introduced. It’s hard for me to believe anything can be more powerful than that foundation, but-
Meb:
Well, it’s fascinating. When you talk about this, listening to it, it’s incredibly optimistic and obvious and exciting, and then you do it through the American lens of Big Brother and, don’t know, if it’s even libertarianism. It just wants the government out of their life. The prospect of doing something like this in a country like US, I put it at near zero.
Kevin:
That seems right. That seems like the right number.
Meb:
Rounds to zero is the phrase from Oppenheimer. It’s funny because I wonder what part of the story when we arrive at analyzing these opportunities and investments, we come with our preconditioned bias of thinking of the world in American terms or Western terms or whatever, and then it’s a totally different perspective in India that actually, whereas we may think it’s a potential, everyone sees the China Big Brother, you’re walking through the intersection, they’re going to zap your face and then forever you’re shamed and in a database, but I think on the flip side of that, there’s a ton of positives and opportunity that seem like an Indian example is pretty interesting.
Kevin:
I think it’s just getting started. I think there are …. Again, when you hear this man, an, talk about it, he said, “A lot of the stuff they had no idea of how it was going to work out. They just knew it would be powerful.” Like I said, I think it’s a secret weapon and for many reasons, including what you just mentioned, like a lot of countries, the population is going to look at that as a Big Brother type of thing and not agree to it, at least not anytime soon, and maybe that was part of the success with Aadhaar was voluntary. Nobody had to do it, but I think people saw that there was a benefit. You could prove who you were easily by just looking at a camera, and just as using your QR code to pay for something is better than using cash. There’s a lot other than commerce reasons that that might be a valuable thing or at least a liquefier of things. You think about going through security lines in airports or what have you that can be accelerated with that platform that, again, I think is quite unique.
The other thing that I think is interesting about this, and Nandan Nilekani talks about this as well, but India doesn’t have a very well-developed consumer credit market. I’m not an economist, but what I’ve seen from some economists when they look at India’s consumer credit market and if it starts to grow and look more like a developed world’s consumer credit market where more people have credit and use it, that could add two or three percentage points to their GDP growth on an annual basis, and that’s one of the things now that Nandan is talking about is, well, now that you have this what he calls informational collateral, that it will set the foundation for a potentially very large growth in consumer credit, which then accelerates the GDP growth, which the estimates are 6%-6.5%.
By the way, that’s one of the other things. I have made over the years a number of friends that are Indian investors, and they’re more experienced than me, certainly in India, but they’re more experienced than me also just in years. Many of them have been very successful in venture capital or hedge funds, private equity. I’ve tried to figure out, “Okay. What am I missing here? What can go wrong? What are the things that I’m not understanding?” One of these individuals who has probably in many ways an incredible pedigree, Wharton, early venture investor in India, he’s the real deal and he said, “The thing people are missing is we can probably grow faster, and why not? China grew. It died 10%, 11% for a while. Why can’t India do that?”
I think, again, I’m not an economist, but I feel like the power of this digital platform they had in and of itself could be worth some incremental GDP growth rate. Just if you think about the working capital cycles for people when they’re instantly moving money, so it’s going to be the exciting 20 years in India and it looks really good.
Meb:
So let’s talk a little bit about the investment opportunity set. I think there’s a general apathy when it comes to emerging markets. Part of that as we know is just investors’ sentiment is always drawn to what is going up the most, but one of the reasons I do angel investing is with the hope that trying to stay current and hopefully see around the corner a little bit, and I think we talked about at dinner, but I said a very large number of my startup investments over the past five years in particular but really over the last 10 have been XUS and some of the best performers have been XUS, Latin America, Africa, which we did a whole series on the podcast, but then India, Pakistan, and Bangladesh.
Those three in particular, you see these exponential traction opportunities like you mentioned, where you’re going from yellow pen and paper to all of a sudden a digital adoption and the numbers just very quickly become staggering. So it’s definitely been interesting and curious to watch. As you talk about this message, and you’ve done it before, talking about these markets, what are the biggest pushbacks from investors on why they may not be interested or why they would be not quite yet or turned off by this opportunity?
Kevin:
A lot of our narrative of our India research is, is India like China 15 years ago? As I mentioned that the GDPs were about the same, there wasn’t smartphones back then so we can’t look at smartphone penetration, but it does look statistically like China. Then there’s anecdotal things. My second trip to Beijing was 15 years ago, and I visited the brand new Apple store, the first Apple store that was opened in China, and two weeks after I left India, the first two Apple stores opened there. Now as I may have mentioned earlier, the problem is if you had invested in China 15 years ago, looked and said, “All right, I think China’s going to grow a lot. I’m going to buy the China ETF,” well, you were right, the Chinese economy grew 409%, but the FXI went down 51, so you lost half your money.
So now the question is, okay, well you want to invest in India, the PE multiples for the broad indexes are pretty high, the highest in the world according to Shiller CAPE ratios that Burton likes to use. So as we say in Omaha, you pay a high price for a cheery consensus. The fact that India has all these positive things, that it’s not involved with Russia, that it’s not involved with China and Taiwan, it’s like a safe haven in a way amongst emerging markets where you’ve got wars going on and people think China’s going to do something with Taiwan. There’s all that stuff. India stands alone.
Frankly, we’re finding pretty good reception for it. We didn’t talk about the product for really the first year until I went and saw what I saw and came back and processed it all, but we’ve had some, again, coming off of a very, very small base, we’ve had some flows and people are interested, but one of the challenges that we face as a business is that our existing primary product, EMQQ, it’s available at places like Morgan Stanley and UBS with advisors that we know, and the India product is still small and it’s not available in those places. So the main pushback we get is I can’t buy it because it’s not approved on my broker’s platform.
Meb:
Say, “Good, just go open up a personal PA account and you can buy it in your personal-”
Kevin:
We’re doing what we can to find people that can buy it, but the performance this year is pretty good. It’s up about 20%. As you know, there was a pretty significant correction in our main product, EMQQ, and that was a lot because of the China tensions and the delisting risk and the government crackdown, both of which are done and not really … I don’t think of them the way most people do. I think they were just noise, but they’re also both behind us. The China stocks weren’t the only ones that go down. All the Indian internet companies also went down about 75% from their top. Now when we launched, they were already down a lot. So our track record’s negative, but it would’ve been a bloodbath if we had launched nine months earlier.
I will say that the valuations right now for the INQQ portfolio I think are very compelling. When I look at the PE for the Indian stock market, so if you bought the iShares India product, either the Nifty 50 or the MSCI, they’re basically the same, INDA and INDY. Those products right now, the PEG ratios are very high. I like to use the PEG ratio. That’s the only ratio I care about. I like to look at it two ways. I like to look at the PE over the revenue growth rate because the top line to me is the most pure form of growth. You can have a business that’s even shrinking and buy back stock and otherwise grow your earnings, but that can’t go on forever. So I look at the PE to revenue growth first.
When I look at the PE to revenue growth for the INDA, the INDY, it’s 3.5. You’ve got a 21 PE and a growth rate of 6%. Now, the INQQ has got the same PE and it’s got a growth rate that’s three times that. So the PEG ratio is 1.28 or call it 1.3. So while the India market broadly, the Nifty 50 and the MSCI, they reflect a very rosy outlook with those 3.5 PEGs. These companies, which they’re not included in the indexes, most of them, have a PEG on a revenue basis that’s 1.3. On an earnings growth basis, the PEG ratio for INDA and INDY isn’t as bad. It’s like one seven-ish, but the PEG ratio for the INQQ portfolio is 0.98. So a long-term investor, and if you can buy the digitization of India at a PEG ratio of one today and you’ve got 10 or 15 years, I think you’ll do pretty well.
Meb:
There’s a couple of things that you brought to mind. One is, listeners, we’ll put a lot … Kevin’s mentioned a lot of resources, PDFs, videos. We got the global CAPE ratios from Barclays. All these things we’ll put in the show note links at mebfaber.com. Here’s a fun experiment, listeners, to check your biases is you can pull out a piece of paper and write down, see how many you can guess and see how many you can guess in order the world’s 10 largest stock markets. There’ll be a couple in there that’ll probably surprise you, and there’ll be a couple in there that you’ll probably get way out of order. I think it’s a fun experiment and also to check the magnitude of some of these that are maybe already there that you may not think that would be, and even a few that don’t trade a whole lot. So check it out.
When you’re talking about China and the performance, I don’t know that there’s been a country over this past cycle. There’s certainly been foreign and emerging countries over the last 40, 50 years that has seen a wider spectrum of agony and ecstasy than China. The past isn’t always prologue to the future, but looking at your fund, I was smiling because I’m attracted to stuff that’s in drawdowns. That’s my thing, but looking at your fund in particular, which is more concentrated likely than the broad mark cap index, but the percentile rank, which is waffled between, number one, and it goes to 96, one, 100, two, two, sorry, one year one, then 190, 90. So you have this period where just the flip flop of people being binary, so excited and optimistic, and then so despondent, and just the emotional swings on this country would make a random walker blush, I think, to rope Burton into this.
I love the things that are unloved, and the emerging story, my goodness, across the board feels like that. As you look back at traveling through India, Bangladesh, Pakistan, China even, any particular memories or stories that really stand out? It could be from meeting companies, from chatting with investors to government officials, anything that you’re like, “Wow, this is a great story,” or, “This left a big impression”?
Kevin:
Well, let me speak to the South Asia part of that. First of all, we started in Dhaka in Bangladesh, which might be the most intense city on the planet. The density of Bangladesh we talked about, but the density of Dhaka itself, it just gets hard, you can’t put it into words. The other thing about South Asia is it’s quite chaotic. The streets themselves are sort of emblematic of the whole thing. You’ve got donkeys pulling carts, you’ve got people pulling carts, people pushing carts, cement trucks, bicycles, rickshaws, motorcycle rickshaw, everything, and it’s just chaos, and because of the density of Dhaka, it’s intense, and there were multiple times when we were walking and we literally couldn’t move anymore. We could stop, and it just a … It was a traffic jam, but there were more than just cars involved and you’d have to step backwards three steps and take two steps to the right just to go forward.
So I’d say my first day in Dhaka was quite intense. I think the things we chose to go see were particularly its heads, the wholesale market and so forth. The Dharavi slum in India is also fascinating. This is where the Slum Dog Millionaire came from. It is one of the densest places on the planet. There’s almost a million people. It’s like a third of a square mile. It’s very small and dense.
What I didn’t appreciate is it’s basically a business as well. Basically, one side of the slum, they bring in waste products and plastic remnants and so forth, and they go through the alleys and there’s all these little artisan or craftsman, I don’t know what the appropriate word is, but they’re breaking up things made of plastic and separating them, and then the next station, they’re melting. Basically, by the end of the line, they’re brand new finished backpacks with tags on them that have been all made between the junk pile and the other side of the slum. It was very fascinating.
Also, this is very timely because Tata is getting ready to redevelop the Dharavi slum, which will be interesting because like the hutongs and the lilongs in China, they’re historic neighborhoods, and that’s probably a good reason to modernize it. By the way, the real estate prices in the slum are off the charts. So if you own a house, you already are a slum dog millionaire, basically. So that was interesting.
Meb:
I was going to say, as I try to think of the risk to any investment on the macro, on the micro, on everything … By the way, listeners, two really outstanding books, Shantaram, of course, is famous, White Tiger, also an excellent book. It’s been made into a show, but the book, like many, is probably much better. Are there any things that you think are generally something that people ascribe to being a risk for India? Is the caste system? Is there any political? You mentioned it’s democracy and it seems to be quite a bit more stable. Is there anything that is on the list, whether it’s for you or for other people that are talking about … China, there’s so many front of mind ones with Taiwan and their interactions, but India, at least, I don’t see the headlines as much.
Kevin:
I’m trying to find the risk. The ones that are obvious are, first of all, Modi. Modi, this is a risk … Ultimately, one of the things I think we’ve learned in the last 10 years is it doesn’t really matter what form of government you have. If the guy in charge goes crazy or otherwise does things you don’t like, then all bets are off, and it doesn’t matter if it’s a monarchy or a communist party or a democracy. The person in charge can be a problem.
Now, the good news is I think Modi, he’s an asset, but he’s not in his 30s, so there’s definitely the political risk, the Modi risk. The country has had other leaders that have left office prematurely for unplanned reasons. So there’s definitely racial tensions. Up in the very, very far east of the country, there’s been a whole lot of racial violence. Actually, one of the things that India does when they have problems is they shut off the internet. So there’s a region, a small region in India where they’ve had a lot of sectarian violence and they haven’t had the internet for three months either.
One of the other interesting things I did when I was in India is I went and crossed into Pakistan at the Wahga border, the land border, and it’s where the Indian guards and the Pakistani rangers do their ceremonial march and trying to out high step each other. We flew to Amritsar, which is the main city there, and it’s where the Golden Temple is, which is the center of the secret religion, which is an amazing place, equally as impressive and amazing, I think, as the Taj Mahal.
While we were there that afternoon, the internet went out, and what we found out was there’s a Sikh separatist that had sprung one of his followers from a jail somewhere, and they shut off the internet so he couldn’t communicate with his other separatists. My colleagues were unable to book flights to get out of town that afternoon.
Meb:
You got to carry around Elon’s Starlink, man.
Kevin:
No, I have one somewhere, but I didn’t bring it with me, but I crossed the border in time to get coverage on the Pakistan side. The other risk that seems pretty clear to me is the environmental risk. The country is … So many of the people live along the Ganges River and they’re having very big heat. Literally, it may become uninhabitable, and they’ve seen a lot of problems in the last few years with extreme, extreme heat in and around Delhi. Pollution is a huge problem all over South Asia as well. Again, a lot of the water comes down from the Himalayas, and there’s probably more environmental risk in India than other places.
I think that, as with a lot of other risks, you don’t really know it’s a risk until it shows up and you say, “Oh, yes, that was a risk,” but I’d say the political stability, which is good now, but things can change overnight for any number of reasons, and the environmental risk seems real. Other than those two main ones, it seems like … Because a lot of the India stories, that internal story, whereas the China story was an export driven story, I think what India is going to end up with is a lot more internal growth as opposed to pure export growth, which is what China led with.
Meb:
Well, it’s exciting. When we talked last time, you said you were going to help me when we were starting the Kevin Carter Adventure Capitalist Travel Agency to come give some tours. So I’m going to tag along and join you on one of these next time, but first, we’ll start with a little boat tour of Tahoe. How’s that sound?
Kevin:
That sounds great.
Meb:
Awesome, my friend. Best places for people to check out your funds, websites? I don’t think you do that much on Twitter. Where do they go?
Kevin:
Emqqglobal.com is our website, and then you can find me on LinkedIn, Kevin T. Carter, and yeah, you’ll find us if you want to.
Meb:
Awesome. Thanks so much for joining us again today.
Kevin:
All right. Thanks, Meb.
Meb:
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