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OPTO Sessions

“An Incredible Growth Story” — Kevin T. Carter on Investing in Emerging Markets

On this week’s episode of OPTO Sessions, Kevin T. Carter, Founder and Chief Investment Officer of EMQQ Global, discusses how to invest in emerging markets (EMs) and the key role of technology in driving innovation. He also unpacks his background and perspective as an investor, including how he first “reluctantly” started studying emerging markets.

LINKS TO THE INTERVIEW:

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Kevin T. Carter is Founder and Chief Investment Officer of EMQQ Global, a San Francisco-based investment management and research firm which is, by its own account, “focused on the emerging and frontier markets technology sector”. Carter cites the book A Random Walk Down Wall Street by Burton Gordon Malkiel, who has been an advisor to EMQQ Global since its inception, as an early influence on him.

Carter has been responsible for several important innovations in the world of indexing and investing.

In the latter part of his 20s, he began noticing that the commissions most brokers charged to buy stocks priced the average person out of the stock market. “I realised that you needed to let people buy stocks for $10 at a time. There were stocks like Berkshire Hathaway [BRK-A] that cost $80,000 per share — so you had no chance to invest, unless you could buy fractional shares.”

For this reason, Carter developed eInvesting, the first scaled fractional share/dollar-based investing platform. Carter founded eInvesting in 1999; the company allowed investors to buy fractional shares in dollar amounts, rather than pay the full price of shares.

Active Value

In the episode, Carter elaborates on what he means when he describes himself as an active value investor — a designation that is ultimately inspired by Warren Buffett and Charlie Munger, Chairman and Vice Chairman, respectively, of Berkshire Hathaway.

One of the first distinctions that is commonly made when defining investing styles is between an active investor and a passive, or index, investor.

“What I think of as the pinnacle of active investing is the Berkshire Hathaway approach,” says Carter. “Ultimately, investing in stocks is buying businesses. Whether it’s an investment decision or a business decision, I try to think through a Berkshire Hathaway lens.”

However, Warren Buffett is an advocate of index investing as well as active investing, and this perspective also influenced Carter early in his career. He has always tried to fuse both approaches, and this has led him to realise that there are pitfalls associated with index-based investing, particularly when it comes to EMs.

The MSCI Emerging Markets index “has a lot of problems” according to Carter. “It’s missing a lot of companies, including most of the internet companies. It also has a lot of the so-called state-owned enterprises: government-controlled banks and oil companies that, while they are public, their number one goal is not to grow their earnings like a normal company.”

“When you’re investing in EM consumer technology, you don’t care about where the company is. You care about where the revenue is coming from.”

Many companies are omitted due to the location of their headquarters. But, as Carter points out, especially when investing in EMs, this is a secondary consideration.

“When you’re investing in EM consumer technology, you don’t care about where the company is. You care about where the revenue is coming from.”

China Was the Impulse

Carter explains how his first foray into EMs was “reluctant”, and initially developed from his interest in China’s economic boom nearly 20 years ago.

Around 2005, Malkiel persuaded Carter to concentrate on the China market. The same year, Malkiel was the lead author of a white paper entitled ‘Investment Strategies to Exploit Economic Growth in China’.

At around this time — and again, as a result of his association with Malkiel — Carter had begun providing investment advice to Google [GOOGL] employees, with the company having recently gone public.

“The Google people called me and asked if Burton [Malkiel] could come talk about investing in China. We drove down to Mountain View one day, and Burton gave his talk. Then everyone looked at me and said ‘We want to invest in China.’”

Since then, Carter’s primary focus has been defining investment opportunities, initially in China, but subsequently in EMs more broadly.

Technological Megatrends

This led him to steer those asking for investment advice towards an emerging markets consumer ETF.

However, he had a “lightbulb moment”, which triggered the inception of EMQQ Global, when he realised that of the five stocks in his own portfolio that captured the EM consumer trend, only three were held by the fund he had been recommending. The other two — MercadoLibre [MELI] and 58.com [WUBA] — weren’t included because they were designated as technology stocks.

“Even nine years ago, the FAANG stocks had taken over our stock market. Every earnings season, if you turned on CNBC, you saw the FAANG stocks were crushing it and there was a list of traditional retailers that were going bankrupt, whether it was Sears or JC Penney. The writing was on the wall.”

Carter describes two megatrends that he says are driving an “incredible growth story”.

The first is the rise of the emerging market consumer, the story of whom is “the foundation of what we do here at EMQQ”, says Carter.

The second is the rise of the smartphone: Carter makes the comparison that, while he had a computer for 20 years before he got his first smartphone, for many people living in Ems, their first computer is a smartphone.

Smartphone technology is also rapidly getting cheaper. Reliance Industries’ [RELIANCE:NS] subsidiary Jio launched a smartphone for the Indian market costing only $12 in July; as Carter says, “the pocket-sized supercomputer now costs as much as a couple of cheeseburgers”. In India alone, over 7 million consumers purchase their first smartphone every month.

In this sense, EMs are “leapfrogging” earlier iterations of the internet and directly accessing services that are relatively new in developed markets, transforming their economies in the process.

At the forefront of this trend is the rise of mobile banking, which is changing India and other EMs from principally cash-based economies into thriving digital economies.

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