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Episode #499: Kevin Carter, EMQQ World – India is Occurring NOW
Visitor: Kevin Carter is the Founder & Chief Funding Officer of EMQQ World. Whereas he principally considers himself an energetic “worth” investor, he has collaborated with Princeton economist and indexing legend, Dr. Burton G. Malkiel, for greater than 20 years.
Date Recorded: 8/30/2023 | Run-Time: 55:41
Abstract: In at this time’s episode, Kevin kilos the desk for India’s tech sector. He covers the demographic developments, The India Stack, the distinction from China 15 years in the past and the present valuations. He additionally explains why environmental dangers are one thing to regulate in India.
Hearken to Kevin’s Kevin’s first look on the podcast.
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Meb:
What’s up, everyone? We bought an excellent enjoyable present at this time. We’re crossing some borders with our returning visitor, Kevin Carter, Founder and CIO of EMQQ World. In at this time’s episode, Kevin kilos the desk for India’s tech sector. He covers the demographic developments, the India tech stack, comparisons to China 15 years in the past within the present Indian inventory valuations. He additionally explains why environmental dangers are one thing to regulate in India. Take a look at the hyperlink within the present notes for Kevin’s first look on the present, which is a superb hear earlier than this episode. Please take pleasure in this episode with Kevin Carter.
Kevin, my good friend. Welcome again to the present.
Kevin:
Thanks, Meb. Good to be again.
Meb:
The place do we discover you at this time?
Kevin:
I’m in Lafayette, California, 15 miles east of San Francisco.
Meb:
One in every of our mutual favourite locations on the planet, Lake Tahoe. When’s your subsequent journey up there, man?
Kevin:
I’ll be going up this weekend.
Meb:
Final time we talked to you and, listeners, I might really extremely suggest to take heed to the primary episode with Kevin as a result of we go into his background, which is fairly fascinating. We discuss rather a lot about China and it’s a fairly good half one to this episode. So we’ll put it within the present observe hyperlinks, possibly we’ll publish it within the feed once more simply to have each there. We’re going to hit on a special subject at this time, however within the meantime, we had one in all your companions and mentors over the 12 months on the podcast, Burton Malkiel, who listeners will definitely know that identify. We had been joking as a result of we stated, “Burton, give us slightly one thing to ask Kevin on the present,” and he says, “Do you know after we had been touring across the rising markets, Kevin’s a little bit of a card participant.” So I all the time say, what does that imply? Is that Bridge, Blackjack? Are you a craps gambler? What’s the story? You simply doing your personal due diligence in Macau?
Kevin:
That’s humorous. I’ve been to Macau. It’s arduous to discover a Blackjack desk at Macau and Blackjack’s the sport I prefer to play, however Burton and I, Burton likes Blackjack and he performs by the principles. He’s bought his guidelines. I don’t know in case you requested him for his guidelines, however he’ll give him to you. I can’t keep in mind what they’re precisely. I don’t play by these guidelines. I play slightly bit extra by intestine with some math as properly, however sure, we’re in Australia collectively for some shows about China and we performed on the Star On line casino in Sydney is the place Burton taught me his guidelines of Blackjack. I believe we each walked out with the identical sum of money, however mine was slightly bit extra unstable.
Meb:
I believe each younger particular person goes by means of a second in time the place there’s this attraction to this idea of the Martin Gale, and really rapidly you be taught rather a lot about guess sizing as a gambler, whereby, listeners, in case you don’t know the Martin Gale, it’s primarily you double down each time you lose. Theoretically, when you have an infinite bankroll, you’ll by no means lose as a result of ultimately you’ll win. The issue comes, you be taught a really fast lesson and the ability of exponentials as a result of in a short time in case you lose 5 10 in a row, the guess dimension will get greater than any bankroll anybody will ever have, however assume that’s a enjoyable lesson. Playing, so long as you don’t go broke and even then it may be a great lesson. There’s so many good classes in fascinated by place sizing and the right way to play and odds.
Kevin:
That’s proper. Much like quick promoting, the place you have got 100% upside and limitless draw back and your guess will get larger because it goes, not like a protracted place which will get smaller, it will get larger.
Meb:
One in every of my all-time early favourite podcast visitors was the godfather of Blackjack card counting, Ed Thorpe. Additionally among the best performing hedge fund managers of all time, who the unique beat the seller and beat the market books. Listeners, you may go discover an outdated copy. They’re actually classics. Properly, let’s speak about rising markets. Like many cycles, this cycle feels, like within the inventory markets, they’re persevering with to emerge. I believe as a share of world market cap, we’re within the low teenagers, however once I talked to advisors over the previous variety of years, and Goldman has give you some stats on this, I believe the common allocation sits down round 2% or 3% as a share of their inventory portfolio. So large underweight. Discuss to me slightly bit about the way you see them broadly after which we’ll begin to dial in additional particularly to 1 nation particularly.
Kevin:
I inform individuals there’s actually two issues to learn about investing within the rising markets. The primary is that the factor that’s rising are the individuals. You’ve bought six and a half billion individuals and so they’re shifting up. They’re rising and so they need stuff. They need extra and higher meals, extra and higher clothes. They need home equipment. They wish to go to films and take holidays and so they need a car, and so they need their youngsters to go to Harvard, and that’s an important factor, and that’s a really lengthy one-directional secular pattern that has been very well-documented. So in case you’re investing in rising markets, it’s my perception that that’s what you have to be attempting to seize.
The second factor about rising markets is that there’s an enormous downside, and the issue is the index itself. The MSCI index, which we use to trace the efficiency of rising markets, has plenty of issues. The primary and largest downside, which I encountered my first 5 minutes into being a part of rising markets 18 years in the past, is that the rising markets have plenty of these government-owned banks and oil firm, these state-owned enterprises which can be inefficient, they’ve conflicts of curiosity with you as an investor, and the governance isn’t excellent, and the corruption is all over the place.
So what you discover, and I bought pulled into China 18 years in the past, because of Burton, the very first thing I did was I requested for an inventory of all the businesses within the China ETF as a result of we had these traders that had been desirous about investing in China after listening to Burton speak about China. I assumed we might use the ETF that iShares had. There was just one China ETF again then. It was the FXI, however since I’m an Omaha particular person, I wished to see what had been the businesses. I don’t care in regards to the identify of the ETF, I wish to know what are the companies we’re going to personal.
So I requested for that checklist and that’s when Burton pulled me apart and defined to me that 80% of the index was government-owned banks and oil firms and the way the government-owned banks would make loans to firms that had been already bankrupt, mainly, to maintain the workers paid. In order that’s an enormous downside and I don’t have an answer for it. Quite a lot of traders have given up on rising markets and so they have very small allocations as a result of they’ve had plenty of promise for a very long time, however nobody’s actually bought any actual return from investing there.
In truth, I believe the 12 or 13 12 months return is about 25%. I do know that for the ten years ended with 2022, the earnings development was damaging. So in Omaha, investing is admittedly easy. The explanation companies have worth is as a result of they make earnings for the homeowners. The one technique to make the worth go up is to make the earnings go up, and that hasn’t occurred within the conventional indexes, that are, once more, stuffed with banks and oil firms and mineral firms which can be state-owned and not likely for-profit in a standard sense.
Meb:
We spend plenty of time most likely approach an excessive amount of for this to be wholesome and useful to our obtain statistics, however we spend plenty of time speaking about market cap investing and the way it’s an fascinating and good first step, and it enabled some issues within the ’70s, however so far as an investing methodology can turn into fairly suboptimal given some situations, notably occasions when issues go completely bananas.
The fascinating half that I really feel like is among the largest dislocations for me when speaking about rising markets as a result of I really like my polls on Twitter, and we’ll ask individuals what share of world GDP is rising markets, and nearly everybody says zero to twenty%, 20% to 40%. We each know that that’s completely incorrect. Rising markets find yourself being most of world GDP, which surprises so many individuals. Then wanting on all the assorted statistics, like after we had been speaking about Macau earlier and also you Google Macau On line casino annual income and Vegas annual income, in a short time individuals could be stunned that Macau is multiples of Las Vegas already. So simply the dimensions of rising markets is admittedly staggering, notably for most individuals who’ve by no means completed any touring, which is, in fact, many, if not most.
So that you and I sat right down to dinner and on reflection, we most likely ought to have gone to an Indian restaurant. There’s some good ones round right here versus the one we went to, which was good, however you had been very excited and animated, which is your pure state, however give me the lead in. What was the preliminary attractant to what you see as a reasonably large alternative right here?
Kevin:
Properly, 9 years in the past, first recognized was the truth that all of these billions of customers in rising markets we’re going to get their first ever laptop in type of an Android-based smartphone, and that after they’d these pocket-sized supercomputers, they had been going to get on the web, and that as a result of they didn’t have financial institution accounts and so they didn’t have cars and there was no goal shops, that they might leapfrog and turn into digital customers, and since we’ve had such an evolutionary expertise with data and with know-how, we don’t understand that not everyone else on the planet has traveled that path as we’ve got.
So hastily, what I used to be seeing was that every one of those billions of customers had been logging on and getting their first checking account, however it wasn’t a standard checking account. It was a smartphone-based place to maintain your cash and make funds. Once more, I first noticed that in China. That began occurring in China. As you could know, I launched quite a few China ETFs with Guggenheim, however we launched a China know-how ETF, CQQQ, most likely 13 years in the past to seize that story, the web shopper.
Then I noticed that it was evolving and it wasn’t simply 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 began in China, China’s e-commerce market, it’s the most important on the planet by far. So China is an rising market in a standard sense, however when it comes to the digitization story and e-commerce, China’s probably the most developed nation on the planet by far.
So what we began to see was that whereas there’s the opposite 45 rising markets, they’re mainly the place China was 15 years in the past. So if you concentrate on customers and the web and private computer systems, that mainly began in america within the 12 months 2000. When may you actually have a pc at your home, get on the web and do some enterprise on the web? That mainly began within the 12 months 2000, and we noticed this 15-year S-curve because the FANG shares took over our lives and our inventory market.
The China wave, the second wave was mainly proper behind us, 2005 to 2020, Alibaba and Tencent main the way in which, and now what’s coming is the third wave, and that is the opposite 5 and a half billion individuals that aren’t in China, and India is the most important a part of the story and South Asia, in case you embody Pakistan and Bangladesh to the west and east, that is nearly two billion individuals and about 850 million Gen Z. So that is probably the most fertile floor for this story going ahead.
India stands alone in my thoughts proper no longer solely as the most important alternative in rising markets, however possibly the most effective alternative in rising markets when it comes to a single nation that we’ve seen, and it’s due to quite a few causes which have simply lined up and so they’re lined up at a time when now you can get a $12 smartphone model new in India. After I noticed you for dinner a couple of months in the past, I might inform you you might get a $50 smartphone model new in India. That is an Android-based smartphone, however simply seven weeks in the past, Reliance Jio launched a $12 smartphone, a $12 supercomputer. So whereas China after they bought on-line, they had been on PCs and so they, like us, migrated onto the smartphone, properly, these persons are skipping the PC altogether and the India story is simply extremely compelling.
Meb:
Let’s dig in. So you have got the plain demographic. I really feel like most traders can respect that. You simply talked about there’s multiples extra Gen Z than there are Individuals in whole, simply the dimensions of the quantity of individuals, the density. I’ve by no means been to India. I actually wish to go, so you may assist be my tour information, however inform me slightly bit about what the macro image. Stroll down what took you from, “Okay. That is curious and fascinating,” to, “Okay. That is really actually fascinating.”
Kevin:
Meb, three years in the past, we solely had one half of 1% of EMQQ inside India, and we solely had three publicly traded firms, however what I noticed was that there was dozens of unicorns that had been lined as much as IPO. So I’d initially deliberate to go to India within the spring of 2020, however then the COVID got here and I used to be unable to go, however the IPOs occurred. There have been 23 Indian web IPOs within the first 18 months of the COVID, however all of them went public in India, so that they didn’t get a lot protection right here. What was given me unimaginable quantity of conviction is the final 9 months. I’ve mainly devoted the entire final 9 months to a deep, deep dive into all issues India, together with the web alternative there, the digital alternative that we’ve got tapped into. As , we launched INQQ, the India-only product final 12 months as quickly as there was sufficient firms. So as soon as there was over 20 firms sufficient to make a diversified portfolio is after we registered and launched.
So the story for India, which, by the way in which, this isn’t a secret. Nearly each main funding agency has some report outlining the bullish a part of the India story, however there’s mainly eight bullet factors. First, it’s now the most important nation on the planet. It handed China in April based on World Financial institution, so 1.4 billion individuals in India. When you take a look at the chart because it goes out, it’s going to get larger and greater than China as a result of it’s younger. It has the youngest financial system, a serious financial system. They’re about 11 and a half years youthful on common than China. So that you’ve bought 600 million individuals which can be simply entering into their early a part of their prime. You have got the quickest rising main financial system. Most of that development is coming in a swelling center class that can the truth is go China and have extra consumption inside a decade by most estimates, and also you’ve bought the quickest rising e-commerce market. India’s rising just a bit sooner than Brazil, about 28% a 12 months.
Lastly, and that is the half that I didn’t respect fully till lately, India has a authorities that’s a democracy, which lots of people favor, and it’s a democracy that’s led by a authorities that has mainly gone all in on digitization. Modi, who’s been the chief for the final decade, his entire platform is Digital India. So I knew that they’d completed quite a few initiatives to assist the digitization of the nation, however I had no concept how well-developed these methods and this digital public infrastructure had turn into, which is an summary factor, which I hope we go into intimately. So you have got all these staple items, large, younger, simply the guidelines, and it’s arduous to, with phrases or footage or numbers, to clarify the dimensions of this chance, the sheer variety of people, the density.
Meb:
Properly, you have got an precise fairly good chart and a number of the stats we’ve talked about earlier I believe hit house, however you have got a great chart that we’ll put within the present notes on Bangladesh, however you stated the dimensions of Bangladesh after which if half of the US moved to Illinois is the inhabitants of Bangladesh, which simply places it in perspective, the density.
Kevin:
No, it’s staggering. There’s 170 million individuals and it’s the dimensions of Illinois. Additionally, a 3rd of its all the time flooded. So it’s mainly two-thirds the dimensions of Illinois. You’d should take the third by means of ninth largest international locations and mix them to get to the dimensions of India. It’s very, very younger, it’s very dense, and it’s fairly chaotic. Not like China, which is homogenous, 95% Han Chinese language, India has bought 1600 totally different languages and 24 of them the federal government publishes each doc in. So there’s 1,580 languages that aren’t even acknowledged formally. So it’s extremely numerous and it’s very dense.
The opposite factor that India has going ahead now is also infrastructure. After I bought concerned with China 18 years in the past, it was mainly tied with India. It was slightly bit forward of India when it comes to its GDP per capita, however not very far, however what you might see was China had begun this large infrastructure funding to construct the world’s finest infrastructure, high-speed rail, airports, highways, high-speed trains, and seaports to load up the manufactured merchandise and get them on a ship.
Whereas they had been doing this, India was mired in forms and mainly sat on its arms and didn’t actually put money into its infrastructure, and China blasted forward and mainly quadrupled the dimensions of their financial system. Plus in that interval, properly, India didn’t actually get shifting and the forms that the British left India or I believe largely in charge.
Properly, proper now, Modi is the chief of India, and he’s been the chief for the final 10 years. So he’s ending up his second five-year time period. He’ll nearly actually get one other five-year time period after they vote subsequent 12 months and a fourth time period if he desires it. There’s no time period limits. He’s cherished. He’s bought an 80% approval score. Not everybody likes him, however the overwhelming majority do, and he has bought the federal government organized and environment friendly and really business-like, and that features the infrastructure investments. So the entire infrastructure numbers have exploded below Modi within the final 10 years. They’re at the moment in the midst of a trillion and a half greenback complete infrastructure plan that includes modernizing the beautiful in depth rail community they’ve, electrifying it, including a whole lot of recent stations, modernizing the stations. They’re constructing their very own high-speed trains now. They’ll ship 400 of these trains within the subsequent a number of years connecting the cities, clearly, with the excessive pace rail.
The Indian air journey market’s going to blow up. That’s one of many early luxurious spends of individuals as they transfer up the buyer ladder, they wish to go see the websites of their very own nation. So the home air journey market will explode in India. It’s already exploding. The airports are going to triple by the tip of 2025. So all components of the infrastructure now are catching up. Again 17, 18 years in the past, they’d issues with the ability grid to the factories and so they had brownouts and so forth. They fastened most of that and so they’re making large investments.
Now, plenty of this has to do with this China plus one technique, looking for various provide chains and various suppliers so everybody’s not completely depending on China, and that’s most likely a sensible factor to wish to do anyhow, however the actuality is China’s bought the most effective infrastructure and so they’re in a position to make the most effective merchandise, get them on a ship higher than anyone, and it’s the port capability that’s going to be a bottleneck as a result of China’s port capability is 10 occasions India’s, and it apparently takes a very long time to construct a port.
So that you’ll see manufacturing jobs go to India. Apple’s going to make 1 / 4 of their iPhones, the most recent iPhones, by the tip of 2025 by estimates. So the infrastructure is lastly there and so they’re actually taking it severely and it reveals, and it does feel and look like Shanghai and China did once I first went there 17 years in the past.
Now, right here’s the third a part of this setup that India has, and that is the half that I alluded to earlier that’s it’s distinctive on the planet, no different nation developed or rising has this, and it’s what they name the digital public infrastructure or the India Stack. Many of the parts of this digital public infrastructure whereas summary to me, I knew what they had been, however I didn’t fairly respect how they’d developed and developed. It began in 2009 when the Indian authorities had determined it was lastly time to create a nationwide id card so that everyone within the nation would have a singular 12-digit quantity on a card given formally from the federal government as a result of one of many issues they had been having with growing was that no one had identification. Only a few individuals had driver’s licenses or passports or any type of official authorities identification. As you may think about, it’s arduous to develop your financial system the place no one can show who they’re.
They requested the chairman of Infosys, Nandan Nilekani, if he could be in cost. Mr. Nilekani stated, “Look, I’ll be accountable for this, but when we’re going to do that, I’m going to make use of plenty of know-how as a result of,” as he stated, “I didn’t see as a lot know-how as I might’ve anticipated once I helped the individuals in Bangalore, and now if I’m going to do that, we’re not solely going to make use of the most effective know-how of at this time, however we’re going to look to the longer term, and never solely will we give everyone a card, everyone may also have their 12-digit quantity linked to their eyeball scan and fingerprints.” So each quantity has a human being tied to it, biometric knowledge.
Now, after they launched it in 2010, it was completely voluntary. You didn’t have to enroll. So I knew about this program. I had the brand in my presentation. It’s the nationwide id quantity. That’s going to be good for the financial system, however I didn’t fairly comply with its improvement. Then about three years later, they put one other layer onto the stack. So the Basis Aadhaar, then they put a KYC, know your buyer, layer on high. With this program, they began initiatives in order that you might go into any financial institution. When you had been within the Aadhaar system, you might stroll right into a financial institution and open a checking account in three minutes with no paperwork simply by placing your fingers on a pad and looking out into the digital camera.
In 2016, they launched this different initiative, the Unified Funds Interface or UPI. Once more, this bought plenty of protection. It was a part of Digital India. I put the brand in my presentation about India, however I didn’t actually comply with the event, however the headline of the UPI was that it might permit instantaneous, fully free switch of cash from any particular person to some other particular person or enterprise, no delay, no friction. I may ship you $10, you might ship it again to me. We may do it 20,000 occasions, it might nonetheless be $10.
So I stated, “Okay.” Properly, however to be completely sincere, the primary factor I felt about that program was a priority as a result of one in all our firms that we talked about, it hadn’t gone public but, however it was the Indian Funds Chief, Paytm, which I began that includes in my presentation after Berkshire Hathaway invested within the firm about eight years in the past and it was nonetheless non-public.
The subsequent a part of this isn’t a part of the digital public infrastructure, however it successfully acts prefer it, and this was kind of the Large bang second. This can be a non-public enterprise known as Jio or the Jio Community. That is the most important cellphone provider, the cell phone subscriptions. Jio is a part of Reliance Industries. What occurred, the identical 12 months that the UPI was launched, Mukesh Ambani, who runs Reliance Industries, had made a really decisive resolution that Jio wanted to go all digital and that Reliance wanted to go large on the digitization of India’s story, and their first and really daring transfer was to purchase the one 4G license, the one 4G spectrum within the nation, and make investments $25 billion to construct a national state-of-the-art 4G community that was additionally contemplated 5G and 6G coming down the road.
Now, on the time, there was a couple of dozen different carriers and all of them had been on 2G, and so they had been all locked in a worth battle, and their steadiness sheets had been horrible and so they couldn’t even make investments to maintain their 2G working very properly. So Jio is available in after which they launched within the November of 2006, identical 12 months because the UPI, and their pitch is fairly easy, “We’ve the one 4G community. When you enroll with us, we’re going to offer you free voice calls without end, limitless, and we’ll offer you six months of free knowledge, after which after your six months is over of free knowledge, we’ll nonetheless be the one 4G community and we’ll even have the bottom costs.” In order that was their provide.
Then the objective that Mukesh put ahead was that they might enroll 100 million individuals by the tip of the following 12 months, so by the tip of 2017, and that was a fairly daring objective. It was particularly daring as a result of again then in case you wished to get a brand new cell phone, it took about three hours on common whenever you went to the cellphone retailer since you would, once more, should show who you had been and so they must confirm you manually.
When Reliance Jio launched, they used the Aadhaar system as a result of it’s open for individuals to make use of, and of their shops, they’d mainly the eyeball reader and the fingerprint reader, and so they opened 100 million accounts in 4 months, a mean flip time of 5 minutes down from three hours. So this was the primary time the business energy of this India Stack actually made itself seen.
So now in case you quick ahead to at this time and what’s occurred within the final three and a half years as a result of COVID accelerated as greater than anyone, some other nation, that cell funds have exploded, that UPI platform now accounts for 40% of the world’s real-time on the spot cash transfers, and the slope of the curve continues to be at 45%, 50% development. What has occurred along with that’s the authorities additionally took out the excessive denomination payments and so they simplified the tax code.
So seven years in the past, the Indian financial system was 95% cash-based, paper-based money. Now, it’s 75% digital. So it went from 4.5% digital to 75% digital. Once more, the funds numbers have exploded. The tax revenues to the federal government have exploded as a result of everybody’s now within the correct monetary system not dodging taxes and dealing off of money. So that you’ve taken what would’ve taken 60 years within the outdated world to modernize their monetary system, and so they’ve completed it in seven years.
So this India Stack, no one else on the planet has this, and apparently now, Nandan Nilekani, the chief of all of this, he’s now providing it as much as different international locations. In truth, a number of international locations have signed as much as take a replica of the UPI, together with France. Aadhaar will most likely be slightly tougher to promote individuals due to the privateness, however anyhow, this digital stack is a secret weapon and folks I don’t assume respect it and perceive it as a result of I didn’t perceive it or respect it till lately and it’s not completed.
The opposite necessary component to India is you say, “Okay. Properly, in case you’re going to have e-commerce, what’s the present commerce? The place are individuals getting their stuff at this time?” In South Asia, in India particularly, they get their stuff from 13 million mother and pop shops. So 90% of all shopper spending occurs in these little like a bodega in New York Metropolis. It’s a small store that has 200 gadgets of what you want every single day. Once more, there’s 13 million of those shops and so they’re extra formal retail. Large field shops have been launched, however they’ve not been in a position to take very a lot market share.
So what I believe India goes to finish up with is a hybrid, the place the kirana shops are going to turn into digitized. It’s already occurring. In truth, Paytm, who I referenced earlier, it actually has a stronghold in these service provider markets. Paytm’s discovered a technique to generate profits. They make mortgage now, they turn into the banker for the kirana retailer homeowners and make loans. So, I believe what you’re going to finish up with is a extremely digital mother and pop, hyperlocal e-commerce, and there’s a brand new layer to the stack to drive this. It’s known as the ONDC, and that is the most recent, once more, led by Nandan Nilekani.
The ONDC is the Open Community for Digital Commerce. It’s designed to assist additional combine these mother and pops into the nation’s e-commerce. I can’t clarify it properly, and I don’t assume in case you … There’s an amazing Morgan Stanley interview with this man, Nandan Nilekani. It’s a 12-minute interview the place he talks about all of this stuff from the start after which appears to be like ahead to what’s coming down the pipe, however he says that this specific new program may be probably the most highly effective factor that they’ve launched. It’s arduous for me to imagine something could be extra highly effective than that basis, but-
Meb:
Properly, it’s fascinating. Once you speak about this, listening to it, it’s extremely optimistic and apparent and thrilling, and you then do it by means of the American lens of Large Brother and, don’t know, if it’s even libertarianism. It simply desires the federal government out of their life. The prospect of doing one thing like this in a rustic like US, I put it at close to zero.
Kevin:
That appears proper. That looks like the proper quantity.
Meb:
Rounds to zero is the phrase from Oppenheimer. It’s humorous as a result of I ponder what a part of the story after we arrive at analyzing these alternatives and investments, we include our preconditioned bias of considering of the world in American phrases or Western phrases or no matter, after which it’s a completely totally different perspective in India that really, whereas we might imagine it’s a possible, everybody sees the China Large Brother, you’re strolling by means of the intersection, they’re going to zap your face after which without end you’re shamed and in a database, however I believe on the flip aspect of that, there’s a ton of positives and alternative that appear like an Indian instance is fairly fascinating.
Kevin:
I believe it’s simply getting began. I believe there are …. Once more, whenever you hear this man, an, speak about it, he stated, “Quite a lot of the stuff they’d no concept of the way it was going to work out. They simply knew it might be highly effective.” Like I stated, I believe it’s a secret weapon and for a lot of causes, together with what you simply talked about, like plenty of international locations, the inhabitants goes to have a look at that as a Large Brother kind of factor and never comply with it, no less than not anytime quickly, and possibly that was a part of the success with Aadhaar was voluntary. No person needed to do it, however I believe individuals noticed that there was a profit. You would show who you had been simply by simply a digital camera, and simply as utilizing your QR code to pay for one thing is best than utilizing money. There’s rather a lot aside from commerce causes that that may be a precious factor or no less than a liquefier of issues. You consider going by means of safety traces in airports or what have you ever that may be accelerated with that platform that, once more, I believe is kind of distinctive.
The opposite factor that I believe is fascinating about this, and Nandan Nilekani talks about this as properly, however India doesn’t have a really well-developed shopper credit score market. I’m not an economist, however what I’ve seen from some economists after they take a look at India’s shopper credit score market and if it begins to develop and look extra like a developed world’s shopper credit score market the place extra individuals have credit score and use it, that would add two or three share factors to their GDP development on an annual foundation, and that’s one of many issues now that Nandan is speaking about is, properly, now that you’ve this what he calls informational collateral, that it’s going to set the inspiration for a probably very massive development in shopper credit score, which then accelerates the GDP development, which the estimates are 6%-6.5%.
By the way in which, that’s one of many different issues. I’ve made over time quite a few associates which can be Indian traders, and so they’re extra skilled than me, actually in India, however they’re extra skilled than me additionally simply in years. Lots of them have been very profitable in enterprise capital or hedge funds, non-public fairness. I’ve tried to determine, “Okay. What am I lacking right here? What can go incorrect? What are the issues that I’m not understanding?” One in every of these people who has most likely in some ways an unimaginable pedigree, Wharton, early enterprise investor in India, he’s the true deal and he stated, “The factor persons are lacking is we are able to most likely develop sooner, and why not? China grew. It died 10%, 11% for some time. Why can’t India try this?”
I believe, once more, I’m not an economist, however I really feel like the ability of this digital platform they’d in and of itself could possibly be value some incremental GDP development fee. Simply if you concentrate on the working capital cycles for individuals after they’re immediately shifting cash, so it’s going to be the thrilling 20 years in India and it appears to be like actually good.
Meb:
So let’s discuss slightly bit in regards to the funding alternative set. I believe there’s a common apathy relating to rising markets. A part of that as we all know is simply traders’ sentiment is all the time drawn to what’s going up probably the most, however one of many causes I do angel investing is with the hope that attempting to remain present and hopefully see across the nook slightly bit, and I believe we talked about at dinner, however I stated a really massive variety of my startup investments over the previous 5 years particularly however actually over the past 10 have been XUS and a number of the finest performers have been XUS, Latin America, Africa, which we did an entire sequence on the podcast, however then India, Pakistan, and Bangladesh.
These three particularly, you see these exponential traction alternatives such as you talked about, the place you’re going from yellow pen and paper to hastily a digital adoption and the numbers simply in a short time turn into staggering. So it’s positively been fascinating and curious to observe. As you speak about this message, and also you’ve completed it earlier than, speaking about these markets, what are the most important pushbacks from traders on why they will not be or why they might be not fairly but or turned off by this chance?
Kevin:
Quite a lot of our narrative of our India analysis is, is India like China 15 years in the past? As I discussed that the GDPs had been about the identical, there wasn’t smartphones again then so we are able to’t take a look at smartphone penetration, however it does look statistically like China. Then there’s anecdotal issues. My second journey to Beijing was 15 years in the past, and I visited the model new Apple retailer, the primary Apple retailer that was opened in China, and two weeks after I left India, the primary two Apple shops opened there. Now as I could have talked about earlier, the issue is in case you had invested in China 15 years in the past, seemed and stated, “All proper, I believe China’s going to develop rather a lot. I’m going to purchase the China ETF,” properly, you had been proper, the Chinese language financial system grew 409%, however the FXI went down 51, so that you misplaced half your cash.
So now the query is, okay, properly you wish to put money into India, the PE multiples for the broad indexes are fairly excessive, the best on the planet based on Shiller CAPE ratios that Burton likes to make use of. In order we are saying in Omaha, you pay a excessive worth for a cheery consensus. The truth that India has all these constructive issues, that it’s not concerned with Russia, that it’s not concerned with China and Taiwan, it’s like a protected haven in a approach amongst rising markets the place you’ve bought wars happening and folks assume China’s going to do one thing with Taiwan. There’s all that stuff. India stands alone.
Frankly, we’re discovering fairly good reception for it. We didn’t discuss in regards to the product for actually the primary 12 months till I went and noticed what I noticed and got here again and processed all of it, however we’ve had some, once more, coming off of a really, very small base, we’ve had some flows and persons are , however one of many challenges that we face as a enterprise is that our current main product, EMQQ, it’s accessible at locations like Morgan Stanley and UBS with advisors that we all know, and the India product continues to be small and it’s not accessible in these locations. So the primary pushback we get is I can’t purchase it as a result of it’s not accepted on my dealer’s platform.
Meb:
Say, “Good, simply go open up a private PA account and you should buy it in your personal-”
Kevin:
We’re doing what we are able to to search out individuals that may purchase it, however the efficiency this 12 months is fairly good. It’s up about 20%. As , there was a fairly vital correction in our principal product, EMQQ, and that was rather a lot due to the China tensions and the delisting threat and the federal government crackdown, each of that are completed and not likely … I don’t consider them the way in which most individuals do. I believe they had been simply noise, however they’re additionally each behind us. The China shares weren’t the one ones that go down. All of the Indian web firms additionally went down about 75% from their high. Now after we launched, they had been already down rather a lot. So our observe report’s damaging, however it might’ve been a massacre if we had launched 9 months earlier.
I’ll say that the valuations proper now for the INQQ portfolio I believe are very compelling. After I take a look at the PE for the Indian inventory market, so in case you purchased the iShares India product, both the Nifty 50 or the MSCI, they’re mainly the identical, INDA and INDY. These merchandise proper now, the PEG ratios are very excessive. I like to make use of the PEG ratio. That’s the one ratio I care about. I like to have a look at it two methods. I like to have a look at the PE over the income development fee as a result of the highest line to me is probably the most pure type of development. You possibly can have a enterprise that’s even shrinking and purchase again inventory and in any other case develop your earnings, however that may’t go on without end. So I take a look at the PE to income development first.
After I take a look at the PE to income development for the INDA, the INDY, it’s 3.5. You’ve bought a 21 PE and a development fee of 6%. Now, the INQQ has bought the identical PE and it’s bought a development fee that’s thrice that. So the PEG ratio is 1.28 or name it 1.3. So whereas the India market broadly, the Nifty 50 and the MSCI, they replicate a really rosy outlook with these 3.5 PEGs. These firms, which they’re not included within the indexes, most of them, have a PEG on a income foundation that’s 1.3. On an earnings development foundation, the PEG ratio for INDA and INDY isn’t as dangerous. It’s like one seven-ish, however the PEG ratio for the INQQ portfolio is 0.98. So a long-term investor, and if you should buy the digitization of India at a PEG ratio of 1 at this time and also you’ve bought 10 or 15 years, I believe you’ll do fairly properly.
Meb:
There’s a few issues that you simply dropped at thoughts. One is, listeners, we’ll put rather a lot … Kevin’s talked about plenty of assets, PDFs, movies. We bought the worldwide CAPE ratios from Barclays. All this stuff we’ll put within the present observe hyperlinks at mebfaber.com. Right here’s a enjoyable experiment, listeners, to examine your biases is you may pull out a bit of paper and write down, see what number of you may guess and see what number of you may guess so as the world’s 10 largest inventory markets. There’ll be a pair in there that’ll most likely shock you, and there’ll be a pair in there that you simply’ll most likely get approach out of order. I believe it’s a enjoyable experiment and in addition to examine the magnitude of a few of these which can be possibly already there that you could be not assume that might be, and even a couple of that don’t commerce an entire lot. So test it out.
Once you’re speaking about China and the efficiency, I don’t know that there’s been a rustic over this previous cycle. There’s actually been overseas and rising international locations over the past 40, 50 years that has seen a wider spectrum of agony and ecstasy than China. The previous isn’t all the time prologue to the longer term, however your fund, I used to be smiling as a result of I’m drawn to stuff that’s in drawdowns. That’s my factor, however your fund particularly, which is extra concentrated possible than the broad mark cap index, however the percentile rank, which is waffled between, primary, and it goes to 96, one, 100, two, two, sorry, one 12 months one, then 190, 90. So you have got this era the place simply the flip flop of individuals being binary, so excited and optimistic, after which so despondent, and simply the emotional swings on this nation would make a random walker blush, I believe, to rope Burton into this.
I really like the issues which can be unloved, and the rising story, my goodness, throughout the board seems like that. As you look again at touring by means of India, Bangladesh, Pakistan, China even, any specific reminiscences or tales that actually stand out? It could possibly be from assembly firms, from chatting with traders to authorities officers, something that you simply’re like, “Wow, it is a nice story,” or, “This left an enormous impression”?
Kevin:
Properly, let me converse to the South Asia a part of that. To begin with, we began in Dhaka in Bangladesh, which may be probably the most intense metropolis on the planet. The density of Bangladesh we talked about, however the density of Dhaka itself, it simply will get arduous, you may’t put it into phrases. The opposite factor about South Asia is it’s fairly chaotic. The streets themselves are kind of emblematic of the entire thing. You’ve bought donkeys pulling carts, you’ve bought individuals pulling carts, individuals pushing carts, cement vans, bicycles, rickshaws, bike rickshaw, every part, and it’s simply chaos, and due to the density of Dhaka, it’s intense, and there have been a number of occasions after we had been strolling and we actually couldn’t transfer anymore. We may cease, and it only a … It was a site visitors jam, however there have been extra than simply vehicles concerned and also you’d should step backwards three steps and take two steps to the proper simply to go ahead.
So I’d say my first day in Dhaka was fairly intense. I believe the issues we selected to go see had been notably its heads, the wholesale market and so forth. The Dharavi slum in India can also be fascinating. That is the place the Slum Canine Millionaire got here from. It is among the densest locations on the planet. There’s nearly 1,000,000 individuals. It’s like a 3rd of a sq. mile. It’s very small and dense.
What I didn’t respect is it’s mainly a enterprise as properly. Principally, one aspect of the slum, they bring about in waste merchandise and plastic remnants and so forth, and so they undergo the alleys and there’s all these little artisan or craftsman, I don’t know what the suitable phrase is, however they’re breaking apart issues made from plastic and separating them, after which the following station, they’re melting. Principally, by the tip of the road, they’re model new completed backpacks with tags on them which were all made between the junk pile and the opposite aspect of the slum. It was very fascinating.
Additionally, that is very well timed as a result of Tata is on the point of redevelop the Dharavi slum, which can be fascinating as a result of just like the hutongs and the lilongs in China, they’re historic neighborhoods, and that’s most likely a great purpose to modernize it. By the way in which, the true property costs within the slum are off the charts. So in case you personal a home, you already are a slum canine millionaire, mainly. In order that was fascinating.
Meb:
I used to be going to say, as I strive to consider the chance to any funding on the macro, on the micro, on every part … By the way in which, listeners, two actually excellent books, Shantaram, in fact, is legendary, White Tiger, additionally a wonderful guide. It’s been made right into a present, however the guide, like many, might be significantly better. Are there any issues that you simply assume are typically one thing that individuals ascribe to being a threat for India? Is the caste system? Is there any political? You talked about it’s democracy and it appears to be fairly a bit extra secure. Is there something that’s on the checklist, whether or not it’s for you or for different individuals which can be speaking about … China, there’s so many entrance of thoughts ones with Taiwan and their interactions, however India, no less than, I don’t see the headlines as a lot.
Kevin:
I’m looking for the chance. Those which can be apparent are, initially, Modi. Modi, it is a threat … Finally, one of many issues I believe we’ve discovered within the final 10 years is it doesn’t actually matter what type of authorities you have got. If the man in cost goes loopy or in any other case does belongings you don’t like, then all bets are off, and it doesn’t matter if it’s a monarchy or a communist celebration or a democracy. The particular person in cost is usually a downside.
Now, the excellent news is I believe Modi, he’s an asset, however he’s not in his 30s, so there’s positively the political threat, the Modi threat. The nation has had different leaders which have left workplace prematurely for unplanned causes. So there’s positively racial tensions. Up within the very, very far east of the nation, there’s been an entire lot of racial violence. Truly, one of many issues that India does after they have issues is that they shut off the web. So there’s a area, a small area in India the place they’ve had plenty of sectarian violence and so they haven’t had the web for 3 months both.
One of many different fascinating issues I did once I was in India is I went and crossed into Pakistan on the Wahga border, the land border, and it’s the place the Indian guards and the Pakistani rangers do their ceremonial march and attempting to out excessive step one another. We flew to Amritsar, which is the primary metropolis there, and it’s the place the Golden Temple is, which is the middle of the key faith, which is a tremendous place, equally as spectacular and wonderful, I believe, because the Taj Mahal.
Whereas we had been there that afternoon, the web went out, and what we discovered was there’s a Sikh separatist that had sprung one in all his followers from a jail someplace, and so they shut off the web so he couldn’t talk along with his different separatists. My colleagues had been unable to guide flights to get out of city that afternoon.
Meb:
You bought to hold round Elon’s Starlink, man.
Kevin:
No, I’ve one someplace, however I didn’t carry it with me, however I crossed the border in time to get protection on the Pakistan aspect. The opposite threat that appears fairly clear to me is the environmental threat. The nation is … So lots of the individuals reside alongside the Ganges River and so they’re having very large warmth. Actually, it might turn into uninhabitable, and so they’ve seen plenty of issues in the previous couple of years with excessive, excessive warmth in and round Delhi. Air pollution is a big downside throughout South Asia as properly. Once more, plenty of the water comes down from the Himalayas, and there’s most likely extra environmental threat in India than different locations.
I believe that, as with plenty of different dangers, you don’t actually realize it’s a threat till it reveals up and also you say, “Oh, sure, that was a threat,” however I’d say the political stability, which is nice now, however issues can change in a single day for any variety of causes, and the environmental threat appears actual. Apart from these two principal ones, it looks like … As a result of plenty of the India tales, that inner story, whereas the China story was an export pushed story, I believe what India goes to finish up with is much more inner development versus pure export development, which is what China led with.
Meb:
Properly, it’s thrilling. Once we talked final time, you stated you had been going to assist me after we had been beginning the Kevin Carter Journey Capitalist Journey Company to return give some excursions. So I’m going to tag alongside and be part of you on one in all these subsequent time, however first, we’ll begin with slightly boat tour of Tahoe. How’s that sound?
Kevin:
That sounds nice.
Meb:
Superior, my good friend. Finest locations for individuals to take a look at your funds, web sites? I don’t assume you try this a lot on Twitter. The place do they go?
Kevin:
Emqqglobal.com is our web site, after which you will discover me on LinkedIn, Kevin T. Carter, and yeah, you’ll discover us if you wish to.
Meb:
Superior. Thanks a lot for becoming a member of us once more at this time.
Kevin:
All proper. Thanks, Meb.
Meb:
Podcast listeners, will submit present notes to at this time’s dialog at mebfaber.com/podcast. When you love the present, in case you hate it, shoot us suggestions at suggestions@themebfabershow.com. We like to learn the evaluations. Please evaluate us on iTunes and subscribe to the present anyplace good podcasts are discovered. Thanks for listening, associates, and good investing.
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