Is India the next China? with Kevin Carter, EMQQ Global

Kevin Carter, founder and chief investment officer of EMQQ Global, joined us to disucss his journey in the investment world, initiated by his transformative reading of "A Random Walk Down Wall Street," which led to him working alongside economist Burton Malkiel of Princeton University in creating multiple stock market innovations like fractional investing and personal indexing, and his ultimate focus on China and other emerging markets. 

Carter shares insights on the digital consumer revolution in these markets and his thoughts on India's potential today compared with that of China's 20 years ago.

Note: this episode was recorded before India's 2024 election.

Transcript

00:00:00 NICK LALL
Welcome to the INSEAD Emerging Markets Podcast. I'm your host, Nick Law, and I'm very excited to speak with our guest, Kevin Carter, today. Kevin is the founder and chief investment officer of EMQQ Global. EMQQ Global is a San Francisco-based investment management and research fund focused on emerging and frontier markets technology. invest in publicly traded internet and e-commerce companies operating in over 50 countries, including India, China, Brazil, Indonesia, Nigeria, Egypt, Mexico, and Vietnam, Turkey. And they help investors access the opportunities driven by the digital consumer revolution in these markets with ETFs listed on stock exchanges in the US, Europe, and Asia. Kevin has collaborated at EMQQ and Prior Ventures for over 20 years with Princeton economist, Dr. Burton Malkiel, who over 50 years ago wrote A Random Walk Down Wall Street, which was one of the first major publications to extol the benefits of indices and public market passive investments. And so really excited to talk to you. Would

00:01:02 NICK LALL
love to learn more about your journey and also some interesting thoughts you have on where good investments are these days. I was wondering if you could talk about your background, how you got to know Dr. Malkiel and how that partnership eventually led to investing in emerging markets.

00:01:18 KEVIN CARTER
Sure. I'm trying to remember how it all happened. So here's my story. So I live in San Francisco, actually 15 miles east of San Francisco, which is where I was raised. And I went off to college four years and I came back. And in January of 1992, I had one interview at a company called Robertson Stevens and Company in San Francisco, which at the time was the leading technology-focused investment bank. And my interview was about 20 minutes long. We talked about college basketball. And then the guy said, you can start Monday. And I said, well, I don't know anything about investing. How can I possibly start Monday? And he said to me, go buy this book. And he wrote down a random walk down Wall Street. And I stopped at the bookstore on the way home and I read it over the weekend and I showed up Monday morning. And as you mentioned, that book, I'm sure some of your listeners are familiar with the book, but it was first written 50 years ago. And in the first edition, the author, Bert Malkiel, who is a Princeton economist, he suggested that somebody make a low-cost index fund that just owned all the stocks in the index and didn't trade and had a low fee, because there were no index funds back then. And this was before my time. I mean, I guess technically I was alive, but I wasn't reading the Wall Street Journal when I was two. And because apparently what back then, at the end of the year people would say well none of the active mutual funds beat the index and burton was one of a few people saying well let's just make a fund that just owns the index it doesn't try to buy and sell and you know spend money trading and on the analysts and so forth and so that's what i read you know before i got even started and then i quickly learned that when it comes to investing, I understand indexing and I understand why it works, but I'm an active person and I'm an Omaha person. So when it comes to every investment or business decision, I'm trying to look through Omaha lens. But what happened was in 1998, I was a young, cocky value investor. And I I was a young, cocky value investor, and I was convinced that there was a great opportunity to short this company called Amazon.com, which was a bookstore that sold with a billion-dollar market cap and didn't have much revenue. And I thought it was crazy, the valuation of it. So I decided I would short the stock, and I lost about a third of my money in one day. But the same day that that happened, I saw a company change its name from KTEL to KTEL.com. And KTEL had been a company I had heard about. They used to make music compilations, so greatest hits of the 60s record albums that they'd advertise on TV, and you'd dial the 800 number and get a couple of records sent to you. So I knew about the company from when I was a kid. I didn't know it still existed or that it was public, but when they changed their name to KTEL.com, the stock went from a dollar a share to $30 a share in like one day. And I said, oh my gosh, I've read about this. And I found my copy of A Random Walk and there's a chapter on stock valuations and bubbles. And I found that chapter and A Random and Walk, there's a chapter on stock valuations and bubbles, and I found that chapter, and sure enough, there was a quote from Jack Dreyfuss, who was a big mutual fund guy, from the 1960s, talking about the electronics bubble that occurred back then. Again, I wasn't even bored, but apparently there was a bubble, and companies had started to add the word silicon and electronics to their names. And so there was a quote in the book. There's still a quote in the book about this. And Mr. Dreyfuss suggested that somebody, you know, Shoelaces Incorporated could change their name to Silicon and Electronic Firth Burners, and the stock would go from, you know, eight times earnings to 40 times earnings or whatever it was. earnings to 40 times earnings or whatever it And I was. oh my said, this just gosh, happened. And so I said, I have to call this guy. And we didn't have Google back then, but I went into the search engine that we did have. And I put in this guy's name and up came his Princeton website. And it had his office hours and his picture and his phone number. And I thought, well, I should call this guy. This is right out of the book, literally. And I think I thought I'd get his secretary, but he answered the phone and I said, gee, Dr. Malkiel, I don't know you, but I read your book. This is right out of your book. And anyhow, he asked me to fax him over a Bloomberg story about this KTEL company. And so that's how I first met him. And then I thought he really liked me. It turns out he's just the nicest person in the world and gives probably everybody that impression. And maybe he does like everybody, but a year later, I had an idea for something that I thought would be good for the investment world for individuals in particular. And I called him and asked him if he would consider being an advisor to that company. And he agreed that it was a good idea, but he said that if he was going to be an advisor, he wanted to meet me first. And so I got on a plane and I was 28 years old or 29 years old. And I got on a plane and took the train to Princeton and we had a three hour lunch and we've been working together ever since. So that is the long version of how did I get connected to Bird Malkiel. It's a great

00:06:27 NICK LALL
story. I think that it shows that sometimes it just makes sense to show interest in somebody's work and show an insight that's one that's relevant to them. That's how you can build a relationship. So really cool that that's how you guys met and that it just came from reading his book rather than the story of you started out working

00:06:44 KEVIN CARTER
no no it was it was quite it was quite random and

00:06:46 NICK LALL
also interesting insight i think today you're seeing that a lot with ai or maybe a few years ago it was more blockchain and there's always this new technological trend that people just add that word to the company name

00:06:58 KEVIN CARTER
it might be the single best sign of a bubble and there's been a handful of times in the last 25 years when as soon as I saw a company change its name to add something buzzy, I instantly email Burton. Literally, it might be the single greatest predictor for bubbles is people changing their name. So that's how we got together. And then basically that first company that I started was called e-investing, which was the first real fractional share So brokerage. the problem that first company that I started was called e-investing, which was the first real fractional share brokerage. So the problem that I saw in the market was that if you really break down investing and what somebody should do, like when they graduate from college, they should start saving money and investing every month as much as you can. And whether that's $100 or $500, $1,000, depending on your income and cost of living, and you should put that into the stock market. And the problem was back then, if you wanted to buy a stock, a single stock, you had to buy 100 shares to get the $19 commission. That was the lowest commission you could get. That was Schwab slowly going from 59 to 29 to 19. And now I think it's basically free. But at the time, if you wanted to buy a stock, the cheapest way to do it was $19 for the trade, but you had to buy a hundred shares and the average stock was $30 a share. So you needed $3,000 to buy a stock and get the 1% commission. And most people, especially when they're starting out saving, they don't have that much money, let alone enough money to buy TED stocks. And so they were not forced, but the only alternative was to buy a traditional open and mutual fund. And what I began to realize was that that product structure and really that whole industry in some ways was sort of an evil force. It was like a giant tax where they were taking a 1% management fee or even more, and then they were spending shareholder money on trading, and people would take them to a nice dinner, then they'd send trades. There was a lot of conflicts in the system. And I thought, well, how do we let people just buy stocks directly without the mutual fund structure and without a $3,000 minimum to buy a stock? And by the way, there were also stocks like Berkshire Hathaway that were several thousand dollars a share. So it was not a level playing field. And so I concluded we needed fractional share trading, where you could say, I want to buy $5 of Berkshire Hathaway, or $10 of Coca-Cola, or maybe I want to buy $100 a month, but I want to put $10 into 10 stocks. And you couldn't do that. And so I thought of it, and I got hooked up with some smart people that figured out how to do it. And we filed a patent on fractional share trading. And the company was called eInvesting, the Electronic Investing Corporation. I hated that everyone was talking about e-trading. And trading is gambling. And so it's still a problem. I mean, as you know, that's the way 90% of the world approaches this whole thing. But I wanted people to be e-investing and that this new network technology could allow that by pooling smaller orders to allow for the fractional share trading. And yeah, we sold the company to E-Trade in the year 2000. And then after that, we started this other thing that has also gone mainstream. You can do both of these things. You can do it Schwab now, but 20 years ago, people thought I was crazy. But we started this other thing that is now called direct indexing. So rather than buy an index mutual fund or an index ETF, you could actually buy, especially if you had fractional shares, you could build your own index. And maybe you didn't want to have 500 stocks in it, but you could take 50 stocks from the S&P and get essentially the same performance. But because you own the stocks directly, you could customize. So if you wanted to leave out tobacco or oil or whatever, you could do that. Then for taxable investors, you could also do loss harvesting. So if the auto sector was down, you could sell General Motors and replace it with Ford. So you'd get the same beta as the market, but you'd have a tax alpha. And so that was a theory. And we launched that in... And Burton was the chief investment officer. We launched that in 2002. And again, this has become not as mainstream as fractional shares, but it's coming fast. Schwab, Fidelity, Vanguard, you can do your personal indexing or whatever they call it at these places. So that was sort of the basis of our relationship. I call it my investment Peace Corps years.

00:11:22 NICK LALL
That's really amazing. I mean, those are innovations that have really transformed investing. At this age, we kind of take these things for granted, but 20, 30 years ago, it wasn't as straightforward of a process for the average retail investor. So that's really amazing. I was curious how all that led you to investing in China and you're interested in emerging markets.

00:11:44 KEVIN CARTER
So here's what happened. We sold active index advisors. We called it active indexing, but as the industry, an idea evolved, somebody renamed it direct indexing. And then I think Vanguard calls it personal indexing. It's all the same thing, but we sold active index advisors to a big Boston-based company called the Tixis, which owned another 12 different mutual fund companies and other money managers. And they bought us. And that was in December of 2004. And just before they acquired active index advisors, Google went public. And when they had their IPO, before the IPO, they had an investor planning day. So they invited two industry experts to come to Google and present to all of their employees about investing. I'm like, what should you do now that you're going to be rich? And the two speakers were Bill Sharp, the Nobel Prize winning economist, and my partner, Bert Malkiel, who was also the chief investment officer of my company at the time. And I wasn't invited to that event, but Burton was in from Princeton and we had dinner the night before. And everyone was talking about Google and Google was doing its own unique style of IPO and it was already a pretty big thing. And so Burton gave this talk and a few months later, I got a phone call from a person at Google. And they said, hey, I heard about this active indexing. I want to make my own custom S&P 500 strategy. I want to do this active indexing. And I said, well, that's great. Who's your financial advisor? Because we didn't work with individuals. We worked with advisors at Morgan Stanley or Credit Suisse or Deutsche Bank. And he said, well, I don't have an advisor. And I said, well, I can introduce you to somebody. And he said, I don't want that. You know what I want? I just want to buy it. I don't need anybody else in the middle. And I agreed to meet with this guy. And I drove down to Mountain View one day in the spring of 2005 and kind of explained what we did. And he asked me how much he thought I should put into this strategy. And I asked him how much he had, and he said he had a lot. I told him, well, he's rich, but he was only 25. So he should be conservative because he's rich, but he's also young. So he should be aggressive. And I don't know, maybe you're moderate and I don't have a pie chart with me, but maybe 20%. And then he said, well, what about the rest of the money? And I said, well, I don't do that. And he said, what'd you do? I said, I would just buy a bunch of ETFs, but get the beta with the lowest cost. And he said, well, can you do that for me? So I ended up becoming an advisor to this individual who, I remember when I asked him two questions at the end of the meeting, I said, you want to customize, you want to leave out oil or alcohol? And he said, I never want to own Microsoft. This is why ESG sounds great, but it's hard to package it into one version for everybody. Some people think Microsoft is evil, some people think tobacco is evil, whatever it is. So anyhow, his customization was no Microsoft. And when I said to him, I said, well, what do you want to do with your life? He's the first person I ever heard say artificial intelligence. And now he has pursued that career and has a pretty high profile in that space. But so anyhow, and then he starts introducing me to other people at Google. So all of a sudden in 2005, I start going to Google every week. And while I'm doing that, my partner Burton starts going to China. And two of his Princeton economist friends had gone back to teach economics in Beijing. And they said, hey, Bert, you got to come see this. Like, we're really, this is back, he had gone back to Beijing in the year 2000 to teach economics in Beijing. And he started going to visit. And this is back when China was growing, you know, 11%, 12%. And him and his two friends end up writing a white paper about investing in China. And it got published in the Journal of Investment Consulting. And the people at Google called me and said, hey, is it possible Burton could come down and talk about investing in China? And I said, sure. Next time he's in San Francisco, we'll come down. And it was about 20 years ago, I got in a car in San Francisco. I swooped up Burton at his hotel, and we drove to Mountain View. And he gave this talk. And as soon as the talk ended, all of these Google people looked at me and said, we want to invest in China. And I mean, I had no idea when I got my car that morning that my life was going to take a serious hard turn. But literally from the moment that talk ended until today, that's essentially all I've been doing is trying to figure out what does that mean to invest in China and how on earth do you go about it? So now that was 20 years ago now, and I've learned a lot about China and emerging markets, but that's how I got emerging markets 20 years ago.

00:16:29 NICK LALL
Yeah, that's quite an interesting series of events that led you there. I was wondering if you could talk a little bit about what the experience was once you started figuring out how to invest in China. I mean, at that time, things were really just opening up. And I mean...

00:16:44 KEVIN CARTER
Yeah. Tell people, to be totally honest, the two most important things about investing in China and investing in emerging markets, I learned both of those on the first day. Like the two main things today are still the two things I learned on day one. So what happened was after the presentation, we had lunch at Google. I think Mario Batali was making lunch that day. And they always had these guest chefs down there. And then we drove back to San Francisco, went back up to the office. I walked straight over to our portfolio managers and I said, the Google guys want to invest in China. Give me a list of all the companies in the China ETF. Because there was only one China ETF in the world back then, still trades. It has the ticker FXI. It was the first Chinese ETF from iShares. And I assumed that's what we would use for these people at Google that wanted to invest in China. But since I'm an Omaha person, I don't care what the name of the fund is. I want to know what are the businesses we're going to own. And so I asked for the list. And before they gave me the list, Burton pulled me aside and he said, Kevin, when you get the list, you're going to see that most of the companies are Chinese government-owned banks and Chinese government-owned oil companies. And that didn't sound good for a lot of reasons. And then he started explaining to me that the Chinese banks would make loans that they knew would not get repaid to keep companies afloat. So they kept their employees happy. And when he started explaining this to me, I got sick to my stomach because in Omaha, investing is really simple. The reason any business has value is because it makes profits for the people that own the business. And the only way to grow the value, I mean, the stock market will do whatever, but you can't control that. But the only way to grow your value is to grow your earnings. And if you're telling me that these state-owned enterprises, they don't care about that. And the people that run the companies, much more likely to be focused on how they can steal money or otherwise enrich themselves and not about some shareholder in the United States. And that made me sick to my stomach. And then when I got the list of all the companies in the China index, the China ETF, I saw that it was 80% state-owned enterprises. And so that's the first thing. You can't use the index. I mean, this is a very big problem on the planet. I mean, relative to investing and things. But the MSCI index and the other emerging market indexes are flawed in so many ways. But a third of their congresspeople and two or maybe three of the presidents in the last 20 years had all been stealing money from the state-owned oil junk. Systematically, 5% of every deal. Slush fund. So that's the first thing. anyhow, And then the other thing that I learned on day one, which I think I probably knew ahead of time because people started writing books about this 100 years ago, is that the thing that's emerging in emerging markets is 6.5 billion people. And they want stuff. We have stuff. We're developed, and so we have food. We have clothing. We are fortunate to have appliances and have discretionary spending where we can take a vacation or go to a movie or buy an automobile or send a child to college. Well, guess what? Nobody else has that in emerging markets. That's what these people are. They're moving on up and they want more and better food, more protein, Nikes or fake Nikes. They want to go to a movie. One of the first luxury spends is to get on an airplane and take a vacation. And they'll bring 10 friends to the airport to watch the plane take off. This is the story. And McKinsey calls the growth of the emerging market consumer, the biggest growth story in the history of capitalism, which is a pretty strong statement. And even if they're wrong, and it's the second or third biggest opportunity ever, if you're going to invest in emerging markets, that's what you want to invest in. So from day one, that was the problem I saw. The index, 80% state-owned enterprises, 8% consumer. And so this is why when people, you know, unfortunately, the broad, this has also been the case with other indexes, but the broad MSCI Emerging Markets Index hasn't gone anywhere because the company's having rather earnings. The 10-year earnings growth for the MSCI Emerging Market Index is like negative 0.5% a year. So yeah, those are the two things. It's all about consumption. And really, you're going to invest, you probably want to get targeted. And what I eventually started telling people was that if they wanted to, people would ask me, what's the best emerging markets ETF? Because Burton and I launched a number of China ETFs with Guggenheim that Invesco later acquired. But when I wasn't working with the Guggenheim people, I'd spend my time in Boston and New York with Ivy League endowments and foundations and family offices. And I watched what these investors were doing, which was evolving their EM allocation. And so Harvard, for example, basically doubled and went from 6% to 11.5% in that period. And if you were an institution like that, the way you could invest, you had a lot of choices, right? Like David Swenson at the Yale Endowment took their smartest Chinese alumni and started a venture fund and private equity fund called Hill House, which has been a huge success. But not many people can start their own venture fund in Shanghai, certainly not an individual or advisor in the United States. And so when people would ask me what they should do, I always told them to just buy the emerging market consumer ETF, just to buy the food and clothing companies, right? The Walmart of Mexico, the beer company of the Philippines, et cetera. And that's what I told people. And it was about 10 years ago that someone called me and asked me that question. And I answered that call on this device, my first iPhone, which was sitting on my car seat next to me 10 years ago that someone called me and asked me that question. And I answered that call on this device, my first iPhone, which was sitting on my car seat next to me 10 years ago. And my friend said, what's the best emerging markets ETF? And I started to tell them to buy the emerging market consumer ETF. This was for a daughter's three-year-old's college fund, so long-term money, which is what everybody should have that timeframe in emerging markets. And I started to say the emerging market consumer ETF, but I realized that consumption was changing and it was changing because of this device. And even back then, the UPS driver was at my house once a week, then twice a week, then three times a week that I knew his name. And then there was a white truck and brown truck, and I could tell which color the truck was without even seeing it because it happened so frequently. So I can already see how this device was changing the way my family was consuming. But I had a computer for 20 years before I got this. So what's happening in emerging markets and what EMQQ is all about and our other, we have an ex-China offering, which is FMQQ. We have an India-only offering, which is INQQ, which is what we've been largely focused on recently. But basically, all of those billions of new consumers are getting their first computer today. They never had a desktop computer, and they're never going to have a desktop computer. And their computers don't have an Apple logo. We're talking about a brand new Android-based smartphone, probably made in China, increasingly made in India and other places, but getting better every year and cheaper every year. And we did this talk six months ago, or nine months ago, I would have told you that you could get a brand new smartphone for $50 in India. And that's still true. But you can also get a brand new smartphone in India for $12 now. On July 3rd, Reliance Jio introduced the Jio Bharat, which is literally a $12 brand new smartphone. Now, of course, it doesn't have the power and quality of your iPhone 15. But if you want to make a payment or watch a video, it does the job. So those are the three things that are combining. Billions of people, first computer, first internet access, all at the same time. And because all of these billions of people, they don't have a bank account or a credit card. They've been paying for everything in cash. They don't have a car. They don't have a Target store to go to, even if they had a car. And so these people are leapfrogging and are even more digital than we are. And it starts with the money and getting the money onto the phone. A lot of these emerging market internet companies that we own, the original ones, when they launched, people were paying with cash. So the Uber of Indonesia, Gojek, which basically gives you a ride on the back of a motorcycle or a scooter. They'll give you a helmet with their brand on it basically gives you a ride on the back of a motorcycle or a scooter. They'll give you a helmet with their brand on but you're getting on the it, back. When they people were paying started, the drivers in as was also the case with cash, the Amazon.com of MercadoLibre. Brazil, you And, know, that's quite cumbersome when your drivers have to make change and carry, you know, those security issues. And so what happens is in the case of both of those companies, they create their own payments platform to facilitate their main business. And now, you know, in the case of Mercado and Libre, their fintech business is more valuable than their original business. So imagine if in the United States, I had my checking account at Amazon, and I bought my ETFs and stocks at Amazon, and I got a car loan at Amazon. That's what's happening in emerging markets. So they're leapfrogging. And the result of those three megatrends combining at once has been the fastest growing sector in the world, I think, ever. I'm not positive of anything, but I've given 100 CFA presentations and offer a cash reward if anyone can show me a sector that's grown as fast as the sector, which, by the way, the sector has grown on average about 35% a year for about 14 years, right? So, again, I could be wrong. I've asked people like Burton that, you know, have more experience than me, but nobody can show me a sector that ever grew this fast. So that's ultimately that's why I made EMQQ. I could see that the traditional consumer companies were growing at 15% or 20%, but the internet companies were growing at 120% and had, in many cases, world-class kinds of margins. So that's really how I got in and launched EMQQ. It wasn't all as clear to me then. I mean, I could see that there was a lot of growth happening. I hadn't quite considered the forces behind it, but it's a big deal. And I guess I would also say that it's largely been a China story so far. So if you look at the sector, there's 46 emerging and frontier markets. And if you look at the revenue that I just described, that 35% growth, 80% of that's been China, right? So the way to think about this is there's been two internet waves, and there's a third wave that's happening right now. The first internet wave happened here in the United States and other developed markets. But essentially, we say, when did human beings first have personal computers? Like, when did millions of Americans have a computer at their house or their apartment? And when could they connect that computer to the internet? First on a telephone line. And then when they were connected to the internet, they could open a browser, which showed up in 1995, and they could go to a website and buy something or find an apartment or otherwise do business, do commerce. Basically, that started in the year 2000. Now, I got the internet in 1995 in the Marina District of San Francisco, and I was a tech person in San Francisco. I would logically be early relative to the rest of the world. But let's say that it started in the year 2000. And so from 2000 to 2015, it's still going. But the steepest part of that, the FANG stocks took over our lives and our stock market, first on PCs, then on smartphone. That was the first wave. China was right behind us. China was the second wave. And from 2005 to 2020, you saw Alibaba and Tencent digitize everything in the country from healthcare, commerce, everything, gaming, groceries. So that was the second wave. And so there's been incredible growth there. Unfortunately, the Chinese equities are seriously, seriously out of favor. So unfortunately, investors haven't... The amount of fundamental growth has not been reflected in performance thus far for those companies. And now the third wave is here. And the third wave is all of the other emerging markets. And if you look at China might be an emerging market in a traditional sense. But when it comes to the Internet and e-commerce and smartphones, China is the most developed country on the planet by a mile. China's e-commerce is four times bigger than all of the other emerging markets combined. So you can call it an emerging market, and it is in the traditional sense. But in the internet category, there's nothing like it. It's the Jetsons. But now what's coming is the third wave. And we've seen it in Brazil with MercadoLibre, NewBank, these companies that have done quite well and trade in the United States. MercadoLibre, particularly the Amazon.com of all of Latin America, is a juggernaut. And it's continued to grow at 40% 15 years after going public. The stock's up 5,000% since it went public. Meanwhile, the Brazil index is down 50% in that time. And Petrobras, which is the biggest part of that part of the world, it's down 50%. MercadoLibre, which is up 5,000%, it's not in the index. So the second problem with the index is that most of the internet companies are missing from the index. So you get this giant dose of government-owned banks, and then you don't get the most entrepreneurial companies like MercadoLibre because, well, for a couple of reasons. Either they trade in the United States like MercadoLibre does on the NASDAQ, or their headquarters are in a different country than the revenue. So in Asia, the internet leaders are all headquartered in Singapore. So C-Limited, GoTo, Grab. If you want to invest in the internet of Southeast Asia, those are the companies, but the database says they're in Singapore and that is where they're located, their offices. But the revenue is coming from Vietnam and Indonesia. But this is another problem with indexing is the indexing people don't really look. They say, well, this is what country are you in? You're in Singapore. That's a developed market. You're not in the index. So anyhow, what I was saying was it started the first real ex-China company that, again, this is what the FMQQ offering provides. It's the other emerging markets, which are exciting going forward because the other emerging markets have four times as many people as the other emerging China. which are exciting going forward markets, because the other emerging markets have four times as many people as China. And while China's e-commerce penetration is 25%, the other countries are at five. So this third wave should be the biggest. And it's just starting. And again, it's been happening. We're called a Libre in Latin America, but now it's in India. And India is the center of the emerging market world now. If you sort of step back and say, okay, like the scale of emerging markets, you look at the total population of the countries that are in the MSCI Emerging Markets Index. One third is China. One third is India. The other third are the other 20 something, you know, 24 countries, right? Now, we include frontier markets, but in terms of just the pure emerging markets. So if you don't want to be involved with China for whatever reason, okay, well, then now all of a sudden India is more than half of emerging markets. And India is, you noted, but the title of the talk that I give now for the CFA Society is, is India the perfect emerging market? And it is. Every way, and I don't pose it as a question anymore because it's sort of indisputable. I mean, if you look at what India is right now, it is the perfect emerging market. Because if you look, like, why do you want emerging markets? This is where all the people are. They're younger than we are. Their economies are growing faster, and that's driving consumer class. Okay, well, if that's the checklist, India is not only number one, it's number one ever. There has never been a population as big as India's. It passed China a year ago. Tomorrow, it'll be bigger. The day after that, it'll be bigger. It's growing. So, it will be the biggest country ever ever every day for the next decades. So you got the scale. Again, all of the other emerging markets combined aren't as big. It's young. Half the population is under 25 years old. So again, when I got involved with China 20 years ago, China had a young demographic. But now China's demographics, because of the one-child policy and other things, looks like a European country. And those demographics are so, so important in terms of driving economic growth. And the dependency ratio in China looks like a European country. Again, India is so young. So it's biggest ever, youngest and largest ever. It has the fastest growing major economy. Now, the estimates have been for 6%, 6.5%. The last two quarters, they grew at over 7%. And China was in this phase, they grew at 10%, 11%. And so I'm one of, I think, many people that think actually India can grow faster than 6%. So big, young, fast growing. And then it's all about the consumer and the middle class, the consumer class in India is exploding, just like we saw in China. And actually, the estimates are that India's consumption is going to pass China's within a decade. So if those are the criteria for what are you looking for in the emerging market, you've got it all. I mean, again, emphatically, you've got it all. And then to top it off, you have first sort of the question of, okay, well, why now? Like, where has India been? And that's kind of what my feeling had been, because when we launched, we had 42 internet companies, and 32 were from China, and two were from India. Seven years ago, we have, you know, 80 stocks from China and two from India. And finally, pretty much when the COVID came, so did the Indian IPO. So the COVID may have stopped a lot of stuff, but it did not stop India's technology IPOs. And so finally, we had 25 public companies, which was enough to allow us to launch INQQ, the India-only strategy. But the other thing that India has been lacking the infrastructure, shocking how close China and India were when I got involved. China was a little bigger, but like a couple hundred dollars a year of average GDP, right? Very close. But what you could see every year was China was set on building the world's greatest infrastructure. And because of their form of government, which a lot of people like to but knock, in terms of getting stuff I done, world's mean, greatest infrastructure. And because of their form of government, which a lot of people like to knock, but in terms of getting stuff done, I mean, it's pretty effective. And so they built the world's greatest infrastructure so they could manufacture products better than anybody and get them on a boat. And 80% of the world's trade goes on a boat at some point. And meanwhile, India has democracy, but it has a lot of bureaucracy left from the British. And so India was sitting on its hands, and the power didn't even work. And you had brownouts and dirt roads to get to the factory. I mean, it was kind of a mess. And that has changed under Modi. So Modi is, in many ways, the Deng Xiaoping of the story. And his government, which, again, is just finishing its 10th year, two five-year terms. Modi will almost certainly get a third five-year term in the spring. And he's been running the country like a business. And they've cut out all sorts of red tape. They've simplified the tax code. They've made it easier to do business in a country where permits and it's a mess still exist. But in terms of directionally, they've cut out a lot. And importantly, they've finally got the infrastructure program going. And they have a trillion and a half dollar comprehensive program. They've basically in the last 10 years since Modi got in there, they doubled everything that they had in the first 65 years. And whether it's miles of highway, electrifying the trains, airports, and seaports. And they're going to need deep water ports if they're going to get jobs from China, which is happening. But finally, the infrastructure is happening. And if you go to Bombay, it literally looks exactly like Shanghai did the first time I went there in 20 years. So I can, I think, very credibly say that India is a lot like China 15 years ago or 20 years ago. And it certainly looks like it when you're there. And then, so finally, the infrastructure is there. You've got a democracy. Modi is loved. He's the most popular leader on the planet. Huge approval rating. That doesn't mean everyone loves him. There's religious tensions in the country and the Hindu majority that Modi leads. They all love him, but it's not clear that everyone else does. But either way, he'll get another term. And again, he'll continue to run the place like a business. And in a world, a geopolitical world that's so tense and you've got wars and all sorts of stuff, India's in this incredibly unique place. They can buy Russian oil for 30% off of the market price and still have dinner at the wife. So you've got that going for India. And then things that really set India apart are, and these are probably related. Well, they're certainly related. The first thing they have is a technology sector that's older than me. I mean, India has been a technology powerhouse starting in the 60s And Tata Computer Systems was founded in 1968 before I was found. So you've got most of the public technology companies are the back office processing, the BPO companies that have been, you know, when you call the United Airlines call center or whoever, and you got someone that we're sure was speaking perfect English back in the 80s or 90s that started with that. And these are publicly traded companies. Infosys is sort of the original startup that started in the early 80s and got founder billionaires and an ecosystem of technology that's unmatched. You have a population that has revered education. You have a population that has revered India has their own institutes education. of technology modeled after They've got 23 of And so even if they MIT. don't get into Harvard them. or where increasingly they are getting Stanford, and those schools are increasingly led in, by Indian including my alma the University deans, of Arizona Business mater, School Dean. You've got 25 S&P 500 companies that have Indian including CEOs, Google and Microsoft. The CEOs both started on temporary work visas. So all you've got all these emerging markets. again, right, nobody's got right? Well, that, And so that sets India apart. And then as we discussed, I think, in our preview, the secret sauce on India is something that I know people don't understand because I didn't really understand it until recently, but it's quite important. And it's the digital public infrastructure that India has created for itself, which you'll frequently hear referred to as the India stack. And so basically the India stack, India's digital public infrastructure, just to give everybody an idea about what digital public infrastructure is, because it sounds abstract and boring and like, I don't want anything to do with it. And that's probably why I didn't follow very closely what this is, but this is hugely So there's important. digital public infrastructure that is, everybody that's listening to this, they have digital public infrastructure. The two best examples are the internet, right? These are things that we use every day. We utilize them, but they're sort of in the background. So the internet's one example. And another example is GPS, right? I didn't launch a satellite, but somehow if I order a pizza or eat a ride, they can find me. So those are examples of digital public infrastructure. And what India did starting in 2009 was create its own open APIs, digital infrastructure that the country is now running on and showing to be incredibly powerful, the first thing they launched was an identification layer. So the way it started was, you know, 15 years ago, one of India's biggest problems was nobody had identity cards. Nobody could prove who they were. And less than half of the babies even got birth certificates. I mean, it was pretty kind of a free-for-all. And as you can imagine, it's hard to modernize an economy when nobody can prove who they are. So they wanted to introduce, basically give everybody a physical card with a 12-digit number and their face from the government. And they asked this man, Nandan Nulkani, to be in charge of the program. Now, he's one of the founders of Infosys, and he's currently the chairman of Infosys. But 2009, they asked him to run this program, the Unique Identity Program, and he agreed to do it, but he insisted that not only would they give everybody a 12-digit card, but they had to look to the future and think about technology, and he insisted that everybody that signed up also had their eyeballs scanned and their fingerprints scanned, so that the 12-digit number could be tied directly to an individual human being. Now, this was totally voluntary. This wasn't Big Brother and you had to line up and sign up. It was totally voluntary. And so that was launched in 2010. I knew about it, but I didn't really pay much attention to it. So that program is called Audar, which means foundation. So we talk about the stack. The foundation of the stack is this unique digital identity platform. And then four years later in 2014, which I don't remember this, but this did happen, they added the second layer, which was an identification layer, a know your customer layer, so that if you were in the database, you could prove who you were. And they started a program with the banks and basically said, if you're in the database, you could prove who you were. And they started a program with the banks and basically said, if you're in Ottawa, you can walk into a bank. You don't need anything. You don't need any paperwork. You don't need a card. All you need is your fingers and your eyeball scan, and you can instantly open a bank account. So I didn't follow these two things, but I can tell you what I've learned is that basically 95% of the country is in the database, and they've used the system to open 800 million bank accounts, digital bank accounts. So you've taken 800 million people that weren't really in the financial system, right, and brought them in in a digital way. So financial inclusion at population scale, starting in 2014, and again, now almost everyone's in the database, which is, you can imagine, I mean, obviously the United States is not going to do that, but probably most other countries would not be able to allow themselves to do that. But India did it. And then in 2016 was sort of the big bang year. You had two things happen. Jio launched the first 4G network in India. And back when the smartphones were starting to sell but all the carriers were on 2g and they were in a price war and nobody even had enough money to invest in 3g relying spends 25 billion builds a brand new 4g network ready for 5g and 6g rolls out their geo mobile offering and the main sales pitch is we have 4g and nobody else does but they also had the best price and what they they did was, you know, back then it took about three hours to sign up a new phone subscriber. Jio used the Autohar platform and the KYC layer, and they took that three-hour business cycle and turned it into 10 minutes. And they signed up 100 million people in four months. And now there's almost 500 million people that have used that to get a mobile phone or the smartphone. So you've brought everyone to the digital economy, brought everyone to the banking system, everyone with a supercomputer in their pocket, which, again, you can buy for $12. And then they introduced a payments layer, the UPI, the Unified Payments Interface, which was basically just QR code based payments, which again, they introduced in 2016. And that wasn't cutting edge because China by then, if you spend any time in China, everything was QR code based, including people on the street asking for money. And so QR codes wasn't revolutionary. But what I didn't realize was the UPI isn't just QR code. It's instantaneous and frictionless. So if I send you $10, it's in your account instantly. And if we send it back a million times, it doesn't degrade. It's still $10. So they launched that in 2016. And now if you look at the UPI numbers, I mean, they've absolutely exploded. Indian real-time instant payment market is half of the entire world now. And it maintains a slope of the curve that's like 45 degrees. And as that happened, they took the entire economy seven years ago was only 5% digital. It was 95% paper-based cash. Today, it's 80% digital. People are paying their taxes. They simplified the tax code. They took a lot of big bills out of circulation. So you've basically digitized almost the entire country, and they're not done. They're going to add, well, I just added a layer that'll bring in the mom and pop stores into e-commerce. So India's going to have a hyper-local, kind of a hybrid version of e-commerce, I think. There are 13 million mom and pop stores that dominate retail in India. So they're going to be a lot more digitized. And our mom and pops got run out of town by Home Depot and Target or whatever. But that's not really going to happen in India. I think the local Khorana stores, I think, is already happening. They're thriving. They're digitized. It's all QR code based. And then on top of that, there's likely to be a pretty big advance of the credit availability. Because one of the things that India lacks is it doesn't have much of a private credit market and its Asian neighbors have developed consumer credit and that's led to faster growth. And some economists think that India is going to be able to use this India stack to create a credit market will perhaps allow the entire economy to grow at one or two percentage points faster. So, I mean, India, again, it is the most compelling emerging market. You know, as I said, it really can't be anything else like it, at least in my lifetime. I mean, the next biggest country, you know, is Indonesia. That doesn't have 1.4 billion people and it doesn't have a lot of this other stuff. So India is a unique and big opportunity for sure.

00:46:51 NICK LALL
Sure. Yeah, I think it's just really nothing else really like it except maybe China 15 years ago, as you mentioned. But I think that India is like China

00:46:58 KEVIN CARTER
15 years ago, except it's of course, it's a democracy. But the biggest thing is nobody on the planet had a smartphone 15 years ago, except it's, of course, it's a democracy. But the biggest thing is nobody on the planet had a smartphone 15 years ago, right? There was a couple hundred million PCs in China, but India is going into this stage and they have brilliantly built this digital platform. And now you can get a brand new supercomputer for $12. So the arc of consumer technology is at a point where, well, it's just different. It's better in many ways. It doesn't mean that India doesn't have risk. It definitely has risk. They've got key man risk. Right now with Modi, more than any organization on the planet, you've got religious tensions and other social tensions, got serious climate exposure along the Ganges and in the very wet southeast of South Asia. So this isn't a sure thing, but in terms of just pure growth opportunity, it looks pretty good. And I think it's going to go on for a long time. Yeah.

00:48:00 NICK LALL
No, I think that those tech stack innovations that you mentioned, they not only cut down on corruption and create more efficiency in business and allow more consumers to interact with the level of online commerce that's happened. But I want to talk a little more about the risks that you mentioned. I mean, you talked about how there are all these Indian CEOs of Fortune 500s. One of the problems in India over the past several decades is that there's been brain drain where all the top talent has left the country. So I was wondering if you see that reversing at all or if there could be a positive impact on India because of that. And then secondly, the main difference that I see between India and China 15 years ago is that India definitely has the technological talent and infrastructure that is as good or even surpasses where China was. But a lot of China's growth was driven by manufacturing and it seems that India is still not anywhere near where China was. And because of that, you see a much higher unemployment rate among the large youth population in India. So I was wondering if you have any thoughts on that, on any way to push back or if that doesn't matter in terms of the consumption.

00:49:15 KEVIN CARTER
Well, no, no, no. I mean, all of these things matter or they could matter. So, well, first of all, there's a lot of Indian technologists that never leave India. first Well, of there's all, a lot of Indian technologists that never leave India. And again, they have fantastic IITs. I think there's also, and you see this in other emerging markets, but there's a lot of the diaspora wants to help, wants to go back, wants to participate in the tech sector. And India very much has that. I mean, again, a lot of the workers have come here and we pay better, right? I mean, so if you can get an HB1 visa, you can come here and do well. We've had a lot of layoffs in our tech companies and a lot of the first to go are the Indian tech workers. I was just reading an article recently about, I think he left Microsoft or Google and had come over for his dream job and, you know, eight months or the year into it was furloughed and went back and can only make an eighth of what or, you know, a fraction of what they were making here. And furthermore, that because they have a history of going to the United States, they also get looked at with skepticism by employers, like you're just going to leave again. So no doubt that there is migration to and from amongst the tech talent. But I think in general, there's so much opportunity there now that I think they're likely more inclined to stay or go back. So I think that's worried about that. They do need jobs, and they need manufacturing jobs. And they know And this. part again, of their infrastructure plan has that in mind and having these tradeify your supply which chain, all of it seems like it's code that one you of, that know, your only supply chain has real risks that maybe yes, you maybe shouldn't put all your manufacturing eggs in one So basket. it sounds great and practical, but the reason everything's made in China is because they make it better and they make it cheap. And so no matter what, you know, in spite of that, people are still going to move jobs out of China to Vietnam, to India, to Mexico. And it's already happening. Apple's going to make 25% of their phones in India. That's their target. They are now making the most. India's had iPhone manufacturing via the Taiwanese manufacturers, Foxconn, et cetera. And so they've been making iPhones, but they've never made the current edition. They've always made the one that was two or three editions. Now they're making the brand new up 15ths there. Tata just announced that they are going to have the first Indian-owned manufacturing plant there. And so you're going to get jobs there. You need them. But you know, because I wasn't maybe the best student, but I remember a lot of the basics of economics and seems to me like it's going to cost more, right? And that's the thing that people don't really talk about. I finally saw an article this weekend about this, but like, okay, it sounds great. Let's move all the jobs to India. They have cheaper labor, but, you know, they don't have ports, right? of jobs to they have cheaper India, but they don't have labor, right? And ultimately, ports, when you look at the constraint, the port capacity in China is the biggest in the region by a factor of 10. And you can't just snap out a port in a year. I mean, these things are lengthy and expensive things. So they're building ports, but you can move manufacturing to India, but it seems like someone's going to have to pay for that. So inflation or lower margins or higher prices, somewhere in there, that's going to be part of the equation. So it sounds great. I don't know how easy it'll be. But that's definitely what is, I think, anticipated a lot is that it will get a lot of manufacturing jobs.

00:53:21 NICK LALL
Sure. It'll be interesting to see how that develops. But nonetheless, I think there's enormous growth that's going to happen there. So may as well look into it as an investment destination at the least. One final question, just as this is a podcast associated with an MBA program, I was wondering if you have any advice for young people who are looking to get involved in working in emerging markets or investing in them, what would your advice

00:53:45 KEVIN CARTER
be to them? Well, someone that has a son that just graduated from college and advising on how to approach life now, you got to learn. I mean, I wasn't a great student when I was in college, but as soon as it mattered and I got out, I read everything. And so I would find every piece of writing you can find about out emerging markets, about the history of places like China and India, about investing in emerging markets. And just in general, when you get into the investment business, I think you really just want to memorize everything Warren Buffett says. And you do also want to understand why indexing does work and why it's mathematically impossible for the active managers to beat the index as a whole. And that doesn't matter if that's... There's a lot of people say, oh, well, emerging markets are inefficient. And so the active managers can beat the index. Well, that doesn't... Statistically speaking, that's not true. There's no doubt that they're less efficient, but there's a lot more cost. So whatever, you know, inefficiencies could be squeezed, you're also dealing with a lot more expense in buying and selling things. And, you know, look, I think it's an exciting part of the world. I mean, it is the world. It's 90% of the world's people, their economies are growing faster, and they're going to become bigger and bigger. And I would, again, just start to learn and find an asset management firm that has some sort of an emerging market offering or focus and just get your foot in the door and read and learn. And ultimately, you want to buy great businesses at good prices and you just want to hold them. And that's the miracle of compounding is ultimately so important in all of this. So I guess those would be some of my initial thoughts. And of course, read a random walk down Wall Street as a starter and refer back to it regularly. Wonderful.

00:55:34 NICK LALL
Well, this was absolutely a pleasure. Super fascinating conversation. Thank you so much for joining us, Kevin. All

00:55:40 KEVIN CARTER
right, Nick. Thank you so much.

00:55:42 NICK LALL
Thank you for joining us for this episode of the INSEAD Emerging Markets Podcast. To stay up to date on events we may be hosting, emerging market news, and to build your personal network, please feel free to join the INSEAD Alumni Emerging Markets Interest Group on LinkedIn. Thank you.