ETF Edge - India: the “perfect” emerging market 12/18/24

Episode Date: December 18, 2024

Emerging market performance has been lack-luster in 2024 with one big exception: India. Find out what’s driving explosive growth there.  Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

The ETF Edge podcast is sponsored by InvescoQQQ. Let's rethink possibility. Investco Distributors, Inc. Welcome to ETF Edge, the podcast. If you're looking to learn the latest insights on all things, exchange traded funds, you are in the right place. Every week we're bringing you interviews, market analysis, and breaking down what it all means for investors.

I am your host, Bob Pisani. Global markets have been lackluster through 2024, except for one. Find out what makes India a bit of an exception, and will it continue to lead in 2025? Here's my conversation with Kevin Carter. He's the founder and chief investment officer of EMQ Global, which focuses on India and emerging markets, along with Todd's own, ETF and technical strategist at Stratigus Securities. Kevin, let's start with you.

Your India Internet ETF, INQQ is the symbol of 25% this year. That's essentially the S&P 500 returns, so I know you just returned from a long trip to India. You've said to me many times India is the perfect emerging market. Explain to our viewers why that is. Well, the reason that investors are interested in emerging markets is because they have a lot of people, better demographics and faster growth. And India is number one in all of those categories, and it's number one by a wide margin. It's got the largest population the world ever had. Today, it set a record. Tomorrow it'll set a record. If you leave out China, it's bigger than every other emerging market combined in terms of population.

Its demographics are incredible, the dependency ratio, just the pure number of people under the age of 30, which is twice our population in the U.S. They've got the fastest growing GDP, and that's driving consumption. And so, you know, it's the rise of the emerging market consumer that everybody should be focusing on. But in the case of India, it's a smartphone-enabled consumer. Yeah, and our GDP at 3% this year has been, you know, the envy of the world. India at 7%. That's really something. That's probably got to be the highest in the world. So the key to a lot of this, I know you've been saying, is technology, particularly the digital identification system, India rolled out in 2009. Tell us a little bit about why that's a key

to understanding India. Sure. Well, India has its own homemade digital public infrastructure. These are government-initiated non-profit technology. platforms. You know, we use digital public infrastructure. GPS is digital public infrastructure. The Internet is digital public infrastructure. India built its own to go along with those two things. And it starts with, you know, what you've referenced, which is the National Identity Card Program called AAR. And that, you know, it was meant to give everybody a physical ID from the government. Because one of India's problems in, you know, developing was very few people had a physical identification form. And so not only did they roll out a program to give everyone a physical carpet, they also

scanned their fingers and their eyes. And now 95% of the population is in this. And with that biometric information, they were able to open bank accounts, 800 million people went into a bank and with their finger and looking at a camera opened a bank account in two minutes. So they've used it to sign up mobile phone subscriptions. It used to take three hours to get a new mobile phone. Now you can walk into a store and be out in 10 minutes. So, and that's just one layer of this digital public infrastructure, this India stack, that

is really a game changer in a lot of ways. And nobody else in the planet hasn't even developed. $95. What is it costing at a cell phone in India right now? Well, you can get a $12 geo barat phone now, but I think the average cost is higher than obviously. But, you know, smartphone prices. the Android-based smartphone prices across the world are going to continue to get more and more

affordable and, you know, it's becoming a sort of a necessity of life to have a smartphone. You've got to admit, it's a brilliant way to get 95% of the population has been fingerprinted and ID'd and, you know, can get a bank account right now. That's pretty amazing when you think about it. So you're so considering the amount of people, too, that live there. 1.45 billion people, 95% of them have already been scanned. I mean, I think he's right to focus on on the internet aspect, the digital aspect of this. Markets love growth. What a better story of growth than what Kevin was just talking about.

So that's why India has done so well. Yeah. You know, I know this India internet ETF, I want to talk about it, I NQQQ, it focuses on e-commerce companies in India. Why the focus on e-commerce? What's the idea here? Well, it's the tip of the spear of growth, you know, not just in emerging markets, but on the planet.

And the reality is we've, you know, We've seen this play out in our own market, the S&P 500. I mean, the fang stocks have taken over our world, first on PCs, then on smartphones. And we saw what happened in China. You know, China hasn't done great, but the best performance remained the Internet companies. And now, you know, India's arrived. And so it's basically a combination of three megatrans at the same time. The first is billions of new consumers, or one and a half billion in the case of India.

They're getting their first ever computer today, basically. You know, I got a computer in the late 1980s, right, when I went to college, but most of the world is getting their first computer today or tomorrow. And it's not a desktop. It's an Android-based smartphone. And when they get that device, they're also getting the Internet for the very first time. So you're giving billions of people, supercomputers in their pocket, Internet access. And what makes it so powerful is because the emerging market consumer,

They've never had a bank account or a credit card or a debit card. There's no target stores to go to. So they're leapfrogging and it's driving what, you know, I'm confident is the fastest growing part of emerging markets by a wide margin. We just put up some of the largest holdings. We like to do this just to show you what's underneath some of these. And there's memes that I don't think are familiar to a lot of people. So tell us about some of these companies.

Zomato is a name I know about. They've been around for a while. They do what, it's a food. delivery company, essentially, Zomato, right? Yeah, let me actually talk about Zomato, because one of my biggest takeaways from my trip has to do with Zomato. So, you know, historically, what I wanted to make it easy, I would tell people, it's the DoorDash of India, right?

So they do the same thing DoorDash does, which is deliver food from restaurants. But what I like to point out about India is, you know, when DoorDash showed up in the United States, we had plenty of restaurants. a problem. We also had lots of companies supplying the restaurants. But in India, everything's kind of green fields. And so a year ago, I would have told you that Zamato's fastest growing business was selling retail supplies to the restaurant. So they were booming in the restaurant supply market with their hyper-pure offering. But there's another business model that they have deployed that is absolutely exploding in India, which is quick commerce.

which is basically 10-minute delivery of anything. And they have a brand called... You say anything? It's not just food. It's not just food delivery. You mean anything? Like an Amazon kind of thing? Basically, like at Amazon. And the way it works is they set up a micro warehouse,

a dark store every, you know, a couple... What you need for this to work is dense populations and low-cost labor on two-wheel vehicles. And I've seen this firsthand in Bogota where this business model really got perfected by a Latin American startup called Ropi. But so you got dense populations. You've got low-cost labor on scooters and bicycles

and motorcycles. And you put in a dark store. And it's right on the street with the other stores, but it's not for retail people to walk into. And then it's all ad-based. And so if you want toothbrush or some mangoes or half a gallon of milk, you push the button, it will arrive in 10 minutes or less.

And this business has absolutely exploded. One of the reasons Zamoto's done so well this year is because the Quick Commerce Business Blinket has exceeded expectations. And it now looks like it's going to be the biggest business at Zabato is going to be Quick Commerce. And there's two other competitors. One of them went public when I was there called Swiggy. And the third one is still private called Zepto. But this is going to be a huge deal because traditional retailing in India is done. at 13 million mom and pop stores, the Corona stores.

And that's 90% of consumer spending. And now they're under serious attack by this, you know, of upstart. Right. And there's other companies here. I see Info Edge. This does like online real estate and job ads, for example. I don't think online real estate when I think of India,

or job ads, but as you said, you got 1.4 billion people with suddenly that have simple cell phones, I guess that you can get stuff like. that sure well that they're one of the oldest of the Indian internet companies and their their primary businesses are as you said you know employment and and living which are two important categories but they've been incredibly profitable and so they've also managed to make a lot of other investments so they actually own over 10% of Zamato and they also own a piece of another one of our companies which is the online insurance leader policy

So you get a lot with InfoEd because of their additional investments. Yeah. Ton, I want to bring you in. What about this, all this enthusiasm for India? It does seem to hit all of the right buttons here in terms of the perfect. We've been talking about the perfect emerging market. But what can go wrong? I mean, I recall there was a lot of enthusiasm about China 10 years ago.

And that has cooled significantly. I mean, is there any downside to this? I think the biggest risk for Indian markets is that it gets caught up. in a more prolonged, mean reverting trade, right? Invidia, India, semiconductors, right, AI, they're all kind of the same trade in a sense, just by the momentum, by the growth. And so I think if enthusiasm and expectations

get too ahead of itself for India, you may be in for a more painful period, that would be it. And then the other side of that is, all of a sudden China starts to work. I'm very skeptical of that, given the historical data on China, right? It's a volatile market,

it's returned 0% over 30 years, But maybe that's a 2025 story where things that we want to work, take a backseat to things that we expect to not work. Yeah. What about that, Kevin? I mean, India seems to be the beneficiary of companies that are trying to diversify their supply chains out of China. How far along is that thesis? That's been around for a couple of years now. But how close to any kind of reality is that?

I mean, diversity, India becoming the rival to China for global. It's very, very early. It's very early in that. I mean, obviously, this China Plus One, you know, diversify your supply chains. That's a real thing. The Vietnam's going to benefit. Mexico's going to benefit and has benefited. It's taken a little longer, I think, in India for a number of reasons.

But it's definitely happening. Apple's moved a significant percentage of their iPhone production. So they need jobs. They know they need jobs. They're doing all sorts of things. This is one of the great parts about the. Modi government is they're very pro-business. They know they need jobs and they're doing lots of things to try to track them. They just need to keep getting them and getting more of them.

So India will definitely benefit from the, you know, China plus one trends. The general idea here, though, is it's taking a while, though. They still don't have the infrastructure to become a true rival to China. China just has decades of advances in the infrastructure. I think the interesting thing, though, is India has really chipped away. at China's dominance in benchmark emerging market indices. For the investable conclusion, that's a good thing because it's more balanced. You mean it's a bigger part of the global emerging market? China was 40% four years ago.

India was low double digits, and now it's 20% versus 25%. So while there's a great runway for India to grow as you. And Kevin were talking about, it's on its way to becoming the most dominant emerging market country in the index. So that's a good thing. Kevin, you also run a global internet ETF, a broader one than India, Next Frontier Internet ETF. And those you're keeping notes, the symbols FMQQ, F as in Frank, MQQ.

And this is exposure to Internet and e-commerce sectors of emerging markets, but excluding China here. So why do we have an Internet ETF that's emerging markets that excludes China? What's the thinking here? Well, you know, the broad thinking is that if you're going to invest in emerging markets, I am quite confident that the best way to do that is to invest in the internet companies, not just because they offer the fastest growth and the most long-term growth, but they also, in emerging markets, you've also got a huge corporate governance advantage, because corporate

governance is pretty spotty in emerging markets, but the internet companies are all, you know, not all of them, but most of them run by the founders, they've been funded by US institutions. So that doesn't guarantee better corporate government. governance. But so that's why we're focused on the emerging markets internet sector. Now, we have our, you know, our oldest offering EMQQ is 10 years old. That includes China. The ex-China version, FMQ, obviously there's a lot of people that don't want China for any number of reasons. But the other thing that's important is that, you know, the last 10 years, China's internet companies had massive, massive growth. They're giant companies now. And it's, you know, China's e-commerce market is four times. bigger than all of the other emerging markets. So the next 10 and 20 years, the real growth is going to be in the FMQQ countries that, again, I don't have any problem with China, but it's just a, it's a lot earlier that e-commerce penetration in China's 25% in the rest of emerging markets. It's only about five. And I just want to point out here, some of these companies that you own. Here's

the motto again showing up, but I see Mercado Libra down to now. That's one of the biggest companies in Latin America. That's a delivery service. I mean, is it? Fair to say they're kind of like Amazon, Ricardo Libre for Latin America? Sure. So, yes, it is now the largest market cap company in Latin America. But importantly to mention, it's not included in the I-shares or Vanguard emerging market products for some reason. But it's been the best performing stock in Latin America as well. And as with Zabato, I'll call it the Amazon.com of Brazil.

And that gets you most of the way there. They are the leading e-commerce company and all of Latin America. with Brazil and Mexico being the largest part. But again, in a lot of these emerging market companies, it doesn't go all the way in describing it, because you can't call Amazon the Mercado Libre of anything, because not only is Mercado Libre the e-commerce leader, it's also the financial services leader.

It's a business Mercado Pago dominates the payments, digital payments in India. You can buy your mutual funds and stocks and ETFs at Mercado Pago. Pago you can get a loan from Mercado Pago. So it's it's like Amazon but it also you know has a whole other business that's worth just as much if not more than the e-commerce business. Well it has elements of like almost like Alibaba and some of the big Chinese companies that are out there you can do anything. They're all doing the same thing. Yeah they're all doing the same thing exactly. Any other one you want to highlight here besides besides that particular one?

I think I see C limited is your largest holding here of nearly 10% That's the Southeast Asian Indian, I'm sorry, Southeast Asian internet leader. It also isn't in the ICAERS or Vanguard products. The reason is that their headquarters are all in Singapore, which shows up in the database as a developed country, but their revenues are from Indonesia, Vietnam, etc. And all of these companies had big declines in 2021 and into 2022, but they've all, not all, but the majority of them have come back pretty strong. They've cut costs and got growth back.

So it's been a pretty good run kind of across the board with China, getting a little pop late in the year because of the government initiatives. Okay. Todd, let me just broaden this out a little bit. Give us your perspective on international investing in 2024, just on a price return basis. It looks like it was a good but not amazing year. The U.S. just blew out everything here.

So I see Germany up, Japan up, China's up, depends on how you measure it, but the broad China indices seem to be up. India, depending on how you look at it, up in the mid-teens or in his case in the early 20s. So here's some of the global leaders up here, and I'm using ETFs here, country ETFs. And I see others, Brazil's down. Mexico is up last year, but down this year. Korea, South Korea is down. So a little bit of a mixed picture. But what strikes me about this is there seems to be an almost complete indifference to investing outside the United States.

You and I have been going back and forth about the flows. Europe have been terrible, essentially, there's been outflows. So to wrap this into a bow, what's going on internationally? So I think what's really interesting is the U.S. is almost 70% of the MSCI, all-country world index. That is just dominant for global exposure. Everyone's throwing up their business. Japan is like five. The next biggest one is like Japan.

Yeah, Japan, UK, and then Germany and the rest of Europe. Everyone has thrown up their hands and said, you know, forget the diversification of international, which may come back to BITUS next year. Tech is so dominant that I wonder if there's gonna be this mean reverting risk. And as for Europe, if that major outflows in Europe, the region has not worked for ages,

what it feels like in terms of outperformance. And new Europe ETF launches have stagnated, right? There's no more spin on the, European region or a single country. I think it's interesting from this sentiment's perspective, right? Issuers have moved on from that. And so I do wonder if things are so bad for the European market, for the European economy, that you take a contrarian bet, maybe it outperforms next year.

That's a little bit more of a value tilt, which we know I struggled. But I do think there's some light there. The big problem for Europe is just the lack of tech companies. It's that simple. I mean, what is there? InfoSys over there. You've got a couple of big semiconductor companies, SAP. There's some big.

semiconductor companies, capital equipment companies in Holland, in Netherlands. If you were bullish China for some reason next year, Europe's actually a great way to play it because you have all the European luxury names that get their exposure from there. So I think it's a less volatile way to play China in a sense. Yeah, but the lack of tech companies. It goes to the lack, that is harder to do, I think, innovation. The United States is still the capital of innovation. It's just easier to start companies. It's easier to manage them here in the United States.

You know, it's not a lesson in, you know, the lead. Not something to fade, but just managing a portfolio. Yeah. I'm with you on mean reversion. The problem is people are waiting for a long time for mean reversion. People have been waiting a long, long time for value to come back in the United States. We've been waiting 10 years. I've been waiting for years for Europe to notably outperform.

Been waiting for, you know, just several years. And eventually it will happen. Yeah. But people kind of forget. I do wonder, active in the U.S. doesn't work, right? Active management, especially in the large-caps spectrum. I can make the case for active management internationally because you can find those stocks in the mid-caps or growing up to be large-caps tier.

If you're a good manager, that can outperform as opposed to just using the standard cap-weight benchmark, which is going to have a lot of financials, a lot of consumer staple type means. So maybe that's the path. Yeah, yeah. It's a very tough call because a lot of people I know have basic international ETFs, Vanguard It's total international, basically tracks the world index is XUS. And they've been terrible underperformance. And I don't mean this year, I mean, really since about the mid-2010s, about 2016.

I mean, the underperformance of the global markets became very, very noticeable. And it's really continued unabated for that what's like going on eight, nine years. I think you can melt together in the case for Act, or at least some sort of factor. You can get the Indian names. you can get the software names that have worked in Europe and then these industrials that have you get. Now it's time to round out the conversation with some analysis and perspective to help you better understand ETFs. This is the market's one-o-two portion of the podcast. Todd's own, ETF and technical strategists as Stratiga Securities continues with us now.

And Todd, we just had a very interesting discussion about emerging markets in India and the fact that there are only very modest inflows there and outflows in Europe. Nobody seems to care about anything except the United States. And this amazing year for ETFs, we're going to hit a trillion dollars in inflows. We're north of 10 trillion heading for $11 trillion in assets under management for U.S. ETFs. Summarize this amazing year here. 2024 was the year of the ETF, right?

As you said, 10 trillion in assets, one trillion inflows. We're going to have 700 new products, which is a dizzying amount. I think over 500 of those are going to be active. We had spot crypto ETFs coming to play. We have the first iteration of private credit now available from our friends of bond blocks. And so this might be just the uncorking here. Next year we probably have the share class approval on deck, and that's really going to open the floodgates for a ton of more new fund issuance for better and for worse, right?

What does shark class approval mean for our viewers are not familiar? You have mutual funds, and Vanguard patented this, the patent expired. they were able to make an ETF share class from those mutual funds, and it helped make the mutual funds more tax-efficient. Now everyone else wants a piece of that pie too in order to limit capital gains from the mutual funds, which may open up a ton of more ETS because you have all these mutual funds that have existed for years, and now you'll have the ETF share class in all of that. We'll see how much that happens, but it could make things more difficult for us looking at the industry.

but I'm also interested in the one trillion inflows is that the new norm or is it because we've had such great equity market performance this year that there was a lot of chasing too in terms of the flow. Well obviously we wouldn't get a trillion dollars in inflows if we were down 18% like 2022. Yeah exactly right 22 23 is a little bit more lukewarm and so I wonder if the answer's in between there right maybe we start to flirt with a trillion every year but that's also because of regulatory aspects, including the share class thing. So other than the new share class,

we can assume we're gonna continue to see active ETF products that are out there, more complicated ETF products, more derivative blended. Some of them are like head spinning, how complicated they are. The due diligence needed now for some of these ETFs that are used derivatives is immense. You're gonna have to basically take a master's course,

and understanding some of the strategies. They're not going to be for everybody, but they're basically compliments to your S&P 500 because no one sells the S&P 500 unless you are needing to give something or needing to, you know, go in retirement, you need the cash. And nobody wants to fade the S&P 500 too because of how powerful it's been over the last 15 years. So now you have all these derivative strategies that can offer option income or maybe you want to lever up or some other sort of option type strategy, buffered products, right, structured outcome.

Things are getting far more exotic because of it. how saturated the market is. We're going to pass 4,000 total ETFs in about a month. Yeah, and that is the biggest problem I have. Most people want, and they just want to help choosing something. There's 50, you know, dividend ETFs. There's 15 or 20 China ETFs, so you can get very different outcomes depending on which one you choose. So I don't find people other than you and me that are fascinated by 4,000 ETFs. I want to know one international. I want to know one China. I want to know, they don't want. The spins are just going to keep

coming and coming. And some of the products may be identical. It's a matter of brand preference, right? Are you a Jets or a Giants fan? Both playing New York. Exactly the same thing. That's a good point. Todd, I'm going to have to let you go, but I appreciate it, as always.

Thank you, folks, for listening to ETF Edge, the podcast. Join us again next week. Or remember, etfedge.c.c.com, and we'll be back in a couple of weeks with a brand new 2025 edition of ETF Edge. How does InvestcoQQQQRethink Possibility? By rethinking access to innovation and the NASDA Stack 100. Let's rethink possibility in Vesco Distributors, Inc.