ETF Edge - Is India the perfect Emerging Market? 12/20/23

Episode Date: December 20, 2023

CNBC’s Bob Pisani sat down with Burton Malkiel, Chemical Bank Chairman’s Professor of Economics at Princeton University and author of the legendary investing text, A Random Walk Down Wall Street; Kevin Carter, chief investment officer of EMQQ Global and the India Internet & Ecommerce ETF (INQQ), and Todd Sohn, ETF & Technical Strategist at Strategas Securities. They discussed investing in India’s emerging market and the reasons why it has had a great year compared to other countries. They also look into the differences between China and India, past market performances, and where each stand today. 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, Supporting the Innovators Changing the World, Invesco Distributors, Inc. Welcome to ETF Edge, the podcast. If you're looking to learn the latest insights on all things, exchange-traded funds, you're in the right place. Every week we're bringing interviews, market analysis, and breaking down what it all means for investors. I'm your host, Bob Pazani. Today, on the show, 23, not a great year for international investing, particularly emerging markets. the exception. India, the India Censex index, which is an index of 30 large companies,

is up 15% this year and closed yesterday at a new high. This has been some significant inflows into the larger ETFs that track India this year as well. So why is India doing so well? And what investing in India, what about it, is so compelling right now. Some people are calling it a perfect emerging market. Here is my conversation with Burton Malkyel. He's the Chemical Bank chairman's professor of economics. at Princeton University and author of the legendary investing text, A Random Walk Down Wall Street. Also joining me, Kevin Carter,

Chief Investment Officer of the India Internet and e-commerce ETF, Todd Sohn, ETF and technical strategists as Stratigis Securities. Kevin, let me start with you. You've said many times India is the perfect emerging market. What does that look like? What's a perfect emerging market? Sure.

Well, the reason that people want to invest in emerging markets to start with is because this is where most of the world's people are, They're younger. Their economies are growing faster. And in terms of India, it is leading all of those categories. It's now bigger than China population-wise, having passed them in April. It's got more than half of its population under the age of 30. It has the fastest growing economy. It's actually beaten the estimates the last two quarters and grown at over 7%. Most of that growth is in consumption. And what's coming along with that is $12 super super. computers. The smartphone is bringing those billions of consumers online for the first time. On top of that, you've got a government that's a democracy that's supporting technology, and you've got a talent pool that's really unmatched on the planet. So it really is in every way the perfect emerging market. This $12 smartphone amazes me. I mean, the key to much of what you're talking about seems to be technology, particularly this digital identification system that

India rolled out in 2009 and 2010. Tell us about what that entailed. It's quite remarkable, technological. Sure. Sure. What India has built is its own proprietary digital public infrastructure. Digital public infrastructure that, you know, most people are familiar with are things like the Internet and GPS. India has built its own to run the whole country on it. It starts with a program called Ottawa, which means foundation, which is a digital identification system, where basically everybody in the country now is tied, their identity is tied to their fingerprints and their eyeball scan in this database that was launched in 2010. And what they've used that to do is basically enable about 800 million people to open a digital bank account using just their fingerprints and their eyeball and also to open about 500 million new smartphone subscription. So they've brought everyone into the financial system,

and they brought everyone there in a technological way. And, you know, it's a lot like China 15 years ago, except when China started to grow like this, it didn't have smartphones. Nobody had a smartphone. And now, as you mentioned, you can get a pocket-sized supercomputer for $12 in India. This amazes me.

I mean, this is my iPhone. The new one, the 15th, over $1,000. How do you get a $12 smartphone? I mean, is that real, actually? You can get a $1,000? a smartphone for $12? Well, it's certainly real. And it's, look, it's not a, it's not an iPhone 15. It doesn't have all the power of any of the iPhones, but it serves the two main needs that the, you know, entry level Indian consumer wants. First is payments. And that's where the, the digital

story is really exploding. The number of digital payments in India, real-time digital payments is exploding. It's almost half of the world's real-time digital payments. So that's the first thing they wanted for. And the second is video. And it doesn't have the biggest screen, but it does. does get video and with the lowest cost data in the world as well offered by Reliance Geo, it's really been a game changer in India. It's quite remarkable. I mean, I'm thinking about a dirt poor farmer sitting in the middle of India in a field with nothing around him, but because of this digital identification system, he can get a smartphone for $12.

And with that smartphone, he can open a digital bank account and he has a payment system sitting dirt pour in a hut in a field in the middle of India. It's really kind of mind-boggling. Who invented this system, by the way? I'm just curious. How did it come about? Well, the Indian government had wanted to provide national identity cards, physical cards for a long time. And this was one of the problems that India had in developing

is that less than half of the people even had birth certificates. And so they wanted to start an ID card system. But they asked Nanda Nalconi, the chairman of Infosus, to be in charge of this program. And he insisted that they use, you know, a lot of technology and look to the future. And so he's really been the mastermind of this India stack, which really, again, no other country on the planet has anything like this in terms of a digital foundation for their entire economy. Yeah, quite remarkable. Now, Bert, you've been studying emerging markets for decades.

You've written extensively about it. Kevin's painting a very rosy scenario, but I'm wondering, we've got excited about emerging markets before. remember what was going on in the 1990s in Thailand and Malaysia, of course. There were a lot of China bulls 10 years ago that have since cooled on China. So sort of play this out for us. What are your thoughts on this right now? I think, Bob, it's instructive to look at China. And India is in some sense where China was 20 years ago.

China had Deng Xiaoping, who was introducing capitalism into China, and there was this pivot from the extreme socialism of Mao, and there was terrific demography. Because 20 years ago, China had a young population. It had almost 10 people of working age for every retired person. And the interesting thing is what derailed China was that both of those things have changed now. For one thing, Xi Jinping is far more like Mao than Deng Xiaoping. There's centralized control. He's tough on private firms. and wants the central economy, the central government to control the whole economy, and the

demography has seen a sea change. The one-child policy, which is now over, but fertility rates have remained very low. China, which used to have one of the youngest populations in the world, is now in about the situation that the U.S. is in, not as bad as Europe and Japan, but China. China is aging tremendously rapidly. And by 2050, China will be worse than the United States, about the same as Europe and almost as bad as Japan. So China is not growing anymore. India's population is growing at 1%.

It's young. And as Kevin has said, it's tech savvy. there's a reverence for education, there's hard work, there's a work ethic, they speak English, they've got all of these kinds of things going. And what I think is not likely to happen, at least not for decades, is that if you look at India's demography 10 years from now and 15 years from now, it'll still look good. They're going to be aging, but they've got such good demography now that even 15 years from now, it will still look good. Now, what could derail them? Look, investing has got a lot of risks.

There are ethnic tensions in India. The Modi government could be replaced. But what is unlikely to happen is what happened in China. That is to say, it's unlikely to go into a dictatorship situation because India is still the largest democracy in the world. And as long as the democracy changes, yes, you could have a less favorable government. But I don't think you're going to see the things that derailed China. So you're making a very good point. The problem with China is, number one, demographics are moving against them.

But more importantly, I think your point about communism, I know 10 or 15 years ago, those of us who were watching the international investing community, we were all thinking of Xi Jinping as the new Deng Xiaoping, sort of gentle state communism a la 1970s. And what we got instead, what we got instead was Ji Jinping as Mount Saitung, as you said, which has killed the capitalist. Nobody signed on for that. And I think that's part of the problem international investors now have. We're not getting with what we thought we were getting at this point. And you think this is very unlikely to ever happen in India. That's your point here, right? Not in a democracy. And, you know, you can see it even within the Chinese economy.

One of the reasons the Chinese economy has slowed down is a central government, a dictatorship can make all kinds of mistakes that are harder to make in a democracy. For example, in COVID, Xi Jinping. shut down the entire economy. They also have not let the market direct where investment goes. They have deliberately increased the real estate sector so much now that you have the ever grand type problems where so much money was put into real estate. that it's created bankruptcy problems.

And again, that's where I think the whole economy has just been in part undone. Now, look, I don't think this is the end of China. The IMF forecasts are that India will grow at 6 or 7% over the next 5 or 6 years, and they still think China will grow at 3 or 4%. So I'm not saying China's totally uninvestable, just forget about it, but clearly all the advantage today is with India. And sure there are risks, but these are risks that I suspect are very much worth taking. Very compelling argument on India versus China. Todd, I want to bring you in here.

Give us your perspective on international investing in 2023. You know what strikes me looking at the U.S. U.S. did okay. Latin America, Mexico and Brazil on a price basis, did okay. Europe did okay. But the flows were very anemic. There didn't seem to be a lot of enthusiasm for investing in Europe. And because China was a poor performer, Asia was generally a poor performer in general.

So your thoughts on this and on India? If I could back up to what Kevin and Professor Malchio said that with their idea between going towards India, loosening up on China, speaks to a big theme here, which is EMX China, right? The product launches have accelerated. You have every issue that are now coming out with an EM without the China exposure. FRDM is an important one launched a few years ago. And I think that makes sense. That would mean India should be the beneficiary of any allocators going into those types of products. And the flows are really picking up because China has, frankly, been investors in the butt here over the last.

decade or so. What they're both talking about is greatly increased political risk in China. To defang the arguments here, poor decision-making from a centralized planning and all that. But political risk is much higher than we thought it was going to be because we didn't get the Xi Jinping we thought we were going to get. Yeah, exactly. And it's way too big of a weight within the EEM right now. It's still almost 30%. That's way too much. And there's over 50 China ETFs right now. I think that's a huge product imbalance. We don't need that many China ATFs. It's confusing. It's very confusing.

You have eight shares, A shares, right? And so I think it's way easier just to look at all the other countries around there, Korea, Taiwan, and India. It's a much simpler vanilla. So your point is that the promulcation of indexes and ETFs globally emerging markets, Asia, Pacific, X-China, is a sign of that X-China is a sign that investors are increasingly concerned. Oh, yes, absolutely. And the flows to X-China-type. products prove that too. You're getting model portfolio inflows to the EMX China plays.

As for Europe, Europe's always a rug pull, right? It outperforms at different times during the other year. Earlier this year it outperformed, you have pretty good inflows, and then they all came out in the back half of the year as it became kind of the same old story. But what I do think is interesting about Europe is it's a much different constituency set than the US. It's a lot more industrial and financial heavy. And this is the first time I can remember where we're talking about recessions and economic issues, but it doesn't involve European financial stocks. And those are actually holding up pretty well here. So maybe that does create a nice little 2024 setup for that region. Kevin, India seems to be the beneficiary of companies that are trying

to diversify their supply chains out of China. How far along is that? We often talk about Apple seeking to move along, but there's other companies as well who are trying to do that. Well, I think that's very early, I think, still. The reality is that yes, Apple has started to ramp up production India, but its target is a lot higher, I think, that they plan on having about 25% of the iPhones to be made in India by 2025. So that's definitely happening. But, you know, India needs to continue to invest in the infrastructure because that's, you know, the reason everything's made in China is because China built the world's best infrastructure to make products and get them onto a boat and off around the world. And India has made great strides in the last decade in its infrastructure, but it's got a long way to go, especially in Portland.

capacity. So, Bert, would you agree? Development of infrastructure is the key to keeping this going? I'm assuming the political risk is on the level we think it is now, that nothing untoward is going to happen, as you mentioned there. Other than that,

what else is out there? It seems to me, like supply chain and building infrastructure, as Kevin said, is the key point here. No, there's no question about that. And it will happen. it may happen more slowly than many people might like, but I think they realize that that is what is needed,

and I think that that's going to be part of the growth story over the next decade. And I think it will happen, and I think that, you know, let's just take, you know, it's very hard predicting the future. The IMF has not had too bad a job, and as far as their economists are concerned, there will be this growth of something like 6 or 7 percent, real economic growth versus three or four for China, about one for the U.S. and Europe, and Japan, losing a third. of its population and stagnating. And I think those are probably the most reasonable expectations. They'll undoubtedly be wrong, as economists always are. But I think the general look at economies around the world,

I would certainly put my money on India being the major economy. with the best growth prospects. And I've just one last turn back to politics for either one of you, Bert or Kevin. Modi keeps trying to steer this middle ground. He keeps saying that he's neutral. Kevin, when I was talking on the phone, you were joking to me that, you know, Modi is one of the only people in the world to buy all the Russian oil he wants and still get invited to a White House dinner.

I think that's actually true. So are you assuming that, and that Modi's going to continue to maintain a neutral stance. A lot seems to depend on how well he sort of places them. They're perfectly placed globally economically. But again, a lot of this, which we saw with China, political risk can get very high here. Well, look, you know, as Modi said, he's on the side of peace, first and foremost. So, you know, I think that it's unlikely that that's going to change.

They are running the country like a business now, and I think he's hyper-focused on continuing that. And if you look at the progress they've made and simplifying the tax code, cutting out a lot of the challenges and paperwork that were, you know, not very business friendly, the country has come a long way and it's entering this, this really golden age. And then, you know, you talk about the economic growth that's going to happen. But that digital growth that's going to happen, you know, maybe 500 percent in the next seven or eight years, according to most estimates. So it's the Internet story that's going to be the big part of this. Well, let me ask you about that. I mean, you run, Kevin, several ETFs. They're focused on Internet and E-commerce.

They're in the title. You have the Internet, Internet and E-commerce ETF. And you have an emerging market's Internet and E-commerce ETF. So the focus is on Internet and E-commerce in India. But why is the focus just on that? Well, we have actually three different offerings. We have EMQQ, which is all emerging markets. We have FMQQ, which is our X-China version.

And then finally, INQQ, which is the India-only one, which is what we're, I think, been focused on a lot. And the theory behind all of this is pretty simple. This is the fastest growing sector in the world, and it may be the fastest growing sector in the world ever. And I'm talking about the emerging markets Internet space, and it's being driven by three giant things are happening at the same time. You've got six and a million people.

Let me put back that up. I want to show you some of the companies. Sometimes it's helpful just to talk about the companies that are up. So we're putting up some of your largest holdings here. We have geo-financial services. This is online financial services, right? Is that right? Yes.

Insurance, banking, lending, things like that. Again, what's happening in these billions of people are getting their first ever computer and is discussed, it's a $12 smartphone, and they're getting connected to the Internet for the first time. And because they don't have a bank account, they don't have a credit card, these people are leapfrogging. So the front wave of this in all emerging markets, is getting the money and the financial services onto the phone. So that was one of the companies. I think you had InfoEdge, which is, you know, job ads and real estate ads.

The same kind of things that we've seen take over our lives, the fang stocks that, you know, from 20. What strikes me about this list is it's all Internet, but it's consumer Internet. So Bajajan financial is a consumer lending, online consumer lending company. Geo Financial does financial services online. Zomato is a food delivery company. That may be a little different. Info Edge is online real estate and job ads. Bajas, I see that.

Make My Trip is an online travel company. Angel One is online stock trading. There's a number of these things. It's all online. That's what kind of striking to me. They're consumer focus, but they're online. Consumer focus. That's the tip of the sphere.

I mean, this is where the fastest, look, this is also not really a secret. If you look what's happened in the last 20 years, when the Internet came, the fang stocks took over alive. in this 15-year S-curve, starting on PCs, then going to smartphones. The second wave of the Internet was China from 2005 to 2020. And the stocks have been punished, but the fundamental growth has been remarkable in the Chinese Internet companies. And now the third wave, which is India, Brazil, the other emerging markets that we capture an FMQQ.

Yeah. So we're closing out the year. The India ETF is up 17, 18%. lagging the S&P a little bit, but it's tracked the S&P reasonably well, actually, in the last several years. So I guess the question is, flows have been positive this year, which is an anomaly for Asia. I'm trying to figure out how much of a story we ought to make about this. I see their argument. I think they make tremendous points.

It makes sense. If you're going to be an international investor, this is the area that makes a lot of sense. young, growing economy, dynamic, democratic, very tech focus. That tech story is the key to me. I think the constituency is important, too, right? Yeah, as you just said, you want to be in tech, consumers helpful. And yet international investors have just gotten slammed for so many years. It's hard making this, I feel like people say, Bob, you said this 10 years ago in China, right?

We were all supposed to buy China. The movement, to me, should be unbundling your international exposure. Don't just buy EEM or your broad-based, e-fETF. Go country by country. might be taking a little bit more risk that way and maybe need active management to an extent. But I like the idea of unbundling, right? So that way you're getting your India exposure or if there's a country in Europe that might be heavy on industrials or health care or something like that. You pick those countries instead. Don't go bulk, right? Just thank you. This has been

just a great conversation with three very, very smart people. We get the best people here on ETF Edge folks. Now it's time to round out the conversation with some analysis and perspective to help you better understand ETF. This is the markets 102 portion of the podcast. We'll be continuing the conversation with Todd Sone from Stratigas. A wonderful discussion with Bert Malkiel and Kevin Carter on investing in India. But I wonder about other parts of the world. So I look at Europe and Europe did okay. A good part of Europe like Germany was up 15, 20 percent overall. And yet inflows were anemic. I see it up. But not a lot of enthusiasm for it.

Can we make any case for why anybody would be interested in Europe in 2024? I think that's always an interesting sentiment tell when you have a market that is acting better, especially Germany I think is in a recession or was in a recession and it's still the stocks are children pretty well. No inflows. And I think it speaks to how European investors have really been burned the last 20 years, even since the financial crisis, right? Every time it looks like Europe is ready to move sustainably high.

and even outperform, the rug gets pulled. Right, so you can make some tactical allocations here and there. But I think more broadly speaking, investors should try to drill down and find the markets and economies that, A, have the right constituency and ones that are working rather than going for the broad-based basket. It's a little trickier, a little more active, but that might be the path forward for something like Europe. We're contrasting India to China,

and why India would be better than China at this point, and the argument seemed to boil down to the demographics in China are working against them. They're getting much older. India still has a much younger population. And then it's essentially the political system. We were betting with India, excuse me, with China 10 or 15 years ago, that Xi Jinping, the current head of China,

would be like Deng Xiaoping was in the 1970s, gentle state capitalism, but still capitalist. And instead, we got Ji Jinping as Mao Zetong, which just killed the capitalists. And I think now political risks are much high. in China. India seems to be the world's biggest democracy, and most people say this is not going to happen because of democracy in India. But I'm wondering about, you know, what we do with China. We saw a lot of, you mentioned on the show, a lot of ETFs coming out, global markets,

Asian markets, ex-China, pulling that out. Correct. We've got 50 China ETFs out there, which is a confusing mess. It's very hard to explain to people what they should be owning. where is the global ETF market going right now? It's going active and it's going ex-China because China has burned investors. Over the last 30 years, the annualized return is about 30 or 40 basis points for China. This is supposed to be the next big thing, right, for investors. As you just said, it hasn't worked out that way. China averages a 30% correction per year.

And over those last 30 years, it's had, I believe, about 14 or 15 corrections greater than 30%. So immense volatility to pay that toll. And investors are clearly telling issuers, we don't need this anymore. We want more active, more active international, active India, even active Korea or Taiwan to an extent. And it's this divestment away from China, which still dominates the EEM, right? That is the flagship brand for emerging market investing. And it's still way too large of a weight. So now you're seeing that shift away.

EEM is the emerging market ETF. It's the sort of generic large EEM. for emerging market, but it's, China and Hong Kong has a very heavy weighting. Way too big, almost 30%. That's down from 40% a few years ago. But you think about tech or the magnificent seven in the SMP, and I think some investors get scared of how much their influences on that index. It's even bigger for China in a significant building block for investor portfolios.

So 10 years ago, 15 years ago, I was part of this whole thing. We were talking about investing by market capitalization. So if China was pick a number, 10% of the world, market capitalization, you had to own an index and if you want an international, was 10% in China. That's now being challenged. There are people who are saying China is a different case because of the political risk, and that's why we're getting these ex-China ETFs that are out there. That seems the way the way the global market is dealing with this.

Yeah. I think another part of this is moving away from market cap towards a more quality type filter, free cash flow, understanding which company, just because the company's big, doesn't mean it's going to be a great performer in the future. Or maybe it comes with political risks like we've seen with some of those China behemoths back in 2019, 2020. So a quality India type of fund or a quality Latam. I think those are going to be starting to emerge from a lot of issuers profiles soon. How about here in the United States?

I mean, I notice, for example, I'm always looking at laggards. Healthcare was a comparative laggard. Some of the pharmaceutical stocks had a very rough year. And there's been outflows in the ETFs in this. Is there anything to be made about a contrary in health care or energy, for example, with a big underperformer this year, and yet oil started moving up in the last few days? Yeah, I think health care is super interesting because there's been a massive amount of outflows this year, by far of any sector.

And the other part about, I like about health care, is if the Fed is on hold, if rates are stagnant, or even a cut here or two, and that's okay, biotech should be a beneficiary of that. That's the risk-on part of health care, and that's been through the ringer over the last three years. So if you're looking to diversify away from tech, communications, discretionary, I think health care makes sense. Energy, I think energy is still going through this momentum stall after doubling its weight over the last few years, right? And very much variable-oriented because of what happens with oil.

I could see oil going to 90. I can see going at 50, and it's a really tough place to be right now, at least. I feel better about the healthcare idea for next year. Yeah. It's funny. to me, the pain, everyone basically was short oil, because it never outperformed this year. And everybody figured, well, if it didn't outperform this year, what year will it?

And so the pain trade would be oil suddenly rallies, and it's actually been happening. It was like, what was it, 66, 7 last week, and now it's 74 or something. There are concerns about what's going on over in the Middle East and in the Red Sea. but it's funny how the pain trade really works. Just think of who is offside the most somewhere,

and that's where you'll get the most move in the opposite direction. Sentiment is a very powerful tool, whether you're using ETFs or just individual stocks. It is a super powerful tool when the consensus gets way off sides. I think kind of like we've seen with treasury bills and money markets this year, you usually see a really powerful move in the other direction. Todd, thanks very much. You've been a big help to us all throughout the year.

I look forward to working with you in 2024. Likewise. I appreciate. Todd Sone is with Stratigas, and thank you, everyone, listening to the ETF Edge podcast. We'll be back January 8th for a brand new edition, a brand new year of ETF Edge. Thank you all for listening. InvescoQQQQ believes new innovations create new opportunities.

Become an agent of innovation. InvescoQQQQ, Invesco Distributors, Inc.