ETF Expert Corner

Big Tree Capital CEO Kevin Carter Talks Emerging Markets, EMQQ ETF

April 18th, 2017 by ETF Store Staff

Kevin Carter, CEO of Big Tree Capital, offers his perspective on emerging market stocks and spotlights the Emerging Markets Internet & Ecommerce ETF (EMQQ).

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You can listen to our interview with Kevin Carter by using the above media player or enjoy a full transcription of the interview below.

Nate Geraci: The focus of our show today is on investing in emerging markets. I'm now very pleased to welcome to the program Kevin Carter, CEO of Big Tree Capital. Kevin is a recognized expert in emerging market stocks. He's also the founder of the Emerging Markets Internet and Ecommerce ETF, which we'll talk about here in a moment. This has actually been one of the best performing emerging market stock ETFs this year - it's up some 23%. We're going to start today by talking emerging market stocks in general. Kevin is joining us via phone from just outside San Francisco, California. Kevin, as always, a pleasure to have you on the program.

Kevin Carter: Thanks, guys. Glad to be here.

Nate Geraci: Kevin, so far this year, emerging market stocks, as a whole, have been one of the better performing asset classes. The MSCI Emerging Markets Index is up about 12% through last week. Give us a basic rundown here. What are some of the main reasons emerging market stocks have performed so well recently?

Kevin Carter: Frankly, I think the fact is that emerging markets have been out of favor for quite some time. One of the headlines yesterday was that emerging markets are bouncing back from a six year slowdown. That's true that they've performed well this year and really the last year and a half on a relative basis. If you bring the chart back five years, or ten years, it's pretty much been a flat decade, or a lost decade for emerging market investors. I think it's really about sentiment finally shifting a little bit.

Nate Geraci: If we look more specifically at individual emerging market countries, are there any real standouts in terms of out performers?

Kevin Carter: Certainly, some of the ones that were hit the hardest and that were the most out of favor have performed the best in the recovery. Brazil, in particular, has had a great 12 month period. In terms of the real fundamentals, and this is an important part of investing in emerging markets, the two countries that really matter the most are China and India. Both of those countries have continued to show strong growth. China reported close to 7% GDP growth yesterday for the most recent period. India's really the growth story in a lot of ways in terms of consumption. Those two countries, while they may not be more than 30% of the indexes, they really do represent where the people are that are in fact emerging.

Nate Geraci: Can you talk a little bit more about China? Because as you look at many broad emerging market ETFs, this does tend to be the single largest country exposure. I'm just curious, how has China's economy looked recently overall and what are some potential positive catalysts moving forward?

Kevin Carter: China's economy overall looks quite good, as it has for frankly a decade plus. The growth rate is slowing, but on a larger base, so people, when you see the headlines, they'll frequently be adjectives, or adverbs that paint the growth numbers as somehow poor, but 6.9% growth is something that we haven't seen in decades and probably never will again. I think the Chinese economy remains strong. Within the Chinese economy, it's really the shift to a consumer led economy that continues to show bright spots.

Nate Geraci: Obviously, emerging market stocks have performed very well here recently. Moving forward, it seems to me that three of the biggest potential headwinds to emerging market stocks are a stronger dollar, more protectionist trade policies from the Trump administration, and then geopolitical tensions flaring up, whether we're talking about the South China Sea, or North Korea, or the Middle East. How much concern do you have over each of these and is there anything else that you might add to the list?

Kevin Carter: I think you've hit the three big ones. I think that one of the things I've been happy to see is that a lot of the rhetoric about trade wars and labeling China a currency manipulator and other things that were thrown around during the election season, those things seem to have been put on the back burner. Even yesterday, our president was talking about not labeling China a currency manipulator and then to your third point, getting China's help with the geopolitical problems. I think that the Korean thing has been a problem for a long time. There's a lot of worry about it. There's saber rattling going on, but ultimately the Chinese have more to lose in any problems with Korea. I think any solution to the problem is going to need Chinese leadership. I think those are the issues. I don't have any predictions about how Korea plays out, or how other countries' political problems play out, but I do think it's important that investors understand that emerging markets are a volatile place to invest. One of the bigger problems with emerging markets investing is both corporate governance and also national governance. Sometimes, those problems get intertwined and we're seeing that in Brazil. We're seeing that in South Africa, seeing that in Turkey. Political issues are certainly a problem all over the world, but particularly in emerging markets.

Nate Geraci: Those are some of the potential negatives of emerging markets, but let's talk about some of the positives. Before we talk about your ETF, can you just give us a basic sense as to the general demographics and consumption habits in emerging markets? I saw a stat on your website that by 2025, consumption in emerging markets will account for $30 trillion - nearly half the global total - which is just remarkable to me. Give us some additional color here.

Kevin Carter: You've hit the nail on the head. The story of emerging markets, the growth story of emerging markets and frankly of the whole world, is the rise of the consumer in the developing world. Emerging markets and frontier markets, collectively the developing world, account for about 85% of the world's people, closer to 90% of the world's people under the age of 30. These people are joining the global economy. The GDP growth for this part of the world is twice that of the developing world. You have literally hundreds of millions of people moving on up and going from $2,000 a year of income to $3,000, to $5,000, to $10,000. As they do that, they want more stuff. They want better food. They want basic home appliances. They want a smart phone. Eventually, they want a car and they want their kid to go to college. They're not unlike us, they're just starting at a lower base. That's really where the story is in emerging markets.

Nate Geraci: Our guest today is Kevin Carter, CEO of Big Tree Capital and founder of EMQQ the Emerging Markets Internet and Ecommerce ETF. Kevin, let's talk about your ETF that seeks to offer exposure to the growth of online consumption in emerging markets. Tell us what this ETF holds.

Kevin Carter: The ETF holds all of the Internet companies that operate in emerging markets, in developing markets. There's 40 of those companies today that are publicly traded. Most of them actually trade in the United States, on our exchanges, because they've been backed by US institutional investors. At the top of the list you'll find Alibaba, which most investors have heard of. The ecommerce leader of China, Tencent, which less people have heard of, which is best thought of as the Facebook of China, trades in Hong Kong, those are the kind of companies. It's the "Amazon" of Brazil and the "Uber" of India and those types of companies that we're trying to capture. It's really the same story as the consumer story. Frankly, it's very much like it is here. We used to go to the Target store and the Sears store on a regular basis. Increasingly, it's a brown truck, or a white truck is pulling into your driveway and leaving a box. It's the natural evolution of consumption that it goes online, but in emerging markets the infrastructure for what we would think of as traditional consumption never really got developed. Neither, for that matter, did cable access to high speed Internet. As the world gets smart phones and gets the Internet - for the first time in most cases - a whole new world of consumption opportunity is opening up. You're seeing it in the growth rate. The revenue growth for the companies in EMQQ has averaged over 40% for the last five years. Frankly, I don't believe that has ever happened for a sector in my lifetime. I'd be quite surprised if a sector is able to put up such strong fundamental growth any time in the future like this group has.

Nate Geraci: You made an interesting point there, because something that I have found interesting just in thinking about ecommerce and the Internet and emerging markets is that because of the dynamics in some of these countries, people don't have cars. These countries don't have the infrastructure like we have. There aren't the big box retailers. Because of that, people in emerging markets have actually been forced to turn to technology. In some cases, they're adopting technology quicker than in developed markets. I think you've referred to this before as sort of leap frogging an economic stage. What types of opportunities can that create moving forward? What do you expect to see in terms of growth rates moving forward?

Kevin Carter: It's created lots of opportunities. I suspect the growth rates will slow down. It's hard to maintain a 40% revenue growth for a prolonged period of time, although it's certainly held up pretty strongly for the last six or seven years. I think the growth rates will slow into the 30% range and then eventually into the 20s, but it'll be a long time before that growth rate is a number below 20. In many ways, it's just getting started. We've seen what's happened in China. China was one of the first to really develop out a robust, mobile Internet population. India, by contrast, with over a billion people, has a billion phones out in the population, but only two hundred million of them are smart phones. You have this massive upgrade cycle going on in India. That's producing triple digit growth rates. What's happening are the entrepreneurs in these countries, again usually backed by US venture capital, are finding ways to replicate some of the business models that we've found success with and then augmenting them to fit in their own particular circumstances. One of the areas that's really transforming right now is the Indian versions of Uber. Uber's competing in India, but they're competing with a pretty strong incumbent in Ola Cabs. Really, again, ecommerce is spreading all over the world. We take it for granted, but for most of the world, getting that smart phone is the first time they're really getting access to the Internet.

Nate Geraci: Again, our guest today is Kevin Carter, CEO of Big Tree Capital and founder of EMQQ the Emerging Markets Internet and Ecommerce ETF. Kevin, going back to the ETF, we've obviously covered a number of broad based emerging market ETFs on our program before - ETFs like the Schwab Emerging Markets ETF or the Vanguard Emerging Markets ETF. For the average investor out there, how does EMQQ compare? What are the primary differences here?

Kevin Carter: Let me say that I personally - and I've devoted a decade of my life specifically to this question - I don't think the large, traditional broad emerging market ETFs are providing the exposure to the growth part of emerging markets that they should be. Here's why: the biggest problem, in my mind, by far, is the state-owned enterprise problem. State-owned enterprises, SOEs as we call them, are basically government sponsored companies that are in many cases enormous and in many cases, also corrupt at worst and inefficient at best. It's Chinese state-owned banks. It's Petrobras in Brazil. Any of your listeners that look at the newspaper with any regularity have certainly seen that Petrobras, the Brazilian oil giant, has basically brought the whole country down. Politicians and business leaders and even soccer stars have gotten caught up in a massive kick back and fraud scheme involving Petrobras. Those companies represent about 30% of the broad indexes. They're really not for profit companies. I have a problem with those broad indexes and ETFs. The other problem, at least with the largest one - the Vanguard Fund - is it does not include US listed emerging market companies. If you look at the Vanguard Fund, you'll find that you own the Chinese state-owned banks, but you don't own the entrepreneurial companies like Alibaba and Baidu that are really fueling the growth of the consumer in these markets.

Nate Geraci: Kevin, if I'm an investor and I'm trying to determine whether or not to potentially utilize EMQQ in my portfolio, do you see EMQQ as replacing broad-based emerging market ETFs or does it sit right alongside them?

Kevin Carter: Having worked in the financial advisory space and around the financial advisory space for quite some time, it's certainly, I think, a difficult thing for an advisor to say, "Well, I'm not going to use the broad ETFs and I'm going just pick this narrow, or seemingly narrow slice." In my heart of hearts, I would certainly think that EMQQ should be the holding for emerging market exposure and the broad emerging market ETFs should be avoided. That might be a departure from traditional thinking, but having, again, contemplated this and worked around this for some time, I think it's very clear to me that the exposure to emerging markets that's best is the Internet companies. Not just because of the growth rate, but also because of the corporate governance.

Nate Geraci: We have just a few minutes left here - while we have you on the line, I know you're very plugged-in to the ETF space as a whole. You're certainly recognized as an ETF expert. We're pushing 2,000 ETFs now on the market. We continue to see these trends in terms of dollars flowing from active to passive. Costs continue to come down. There's a lot of chatter over just product proliferation. I'm just curious, can you give us your general assessment of the ETF universe right now?

Kevin Carter: As you pointed out, there's a lot of ETFs. There are lots of people looking for opportunities. Every week and month, the number of opportunities that are available get taken. There's a lot of ideas getting thrown out that are failing to get traction. I think that opportunities are declining. Having said that, I voiced the same opinion ten or twelve years ago and was clearly wrong in my pessimism at that point. I think the other thing and one of the things that I find mildly disturbing in the ETF space is an effort by the existing ETF providers to come up with higher fee versions of traditional beta under the banner of "smart beta" which I find troubling. It used to be when you went to the ETF conferences and the indexing conferences that the ETF providers were the white hats of Wall Street. As the industry has matured, there's, I think, a little bit more focus on finding profitable ventures, which, of course, that's what drives capitalism in the first place.

Nate Geraci: What do you think investors can do to combat that? I think what you're saying is with all the proliferation in the ETF space, obviously Wall Street firms are looking to take advantage of the growth opportunities that exist there. You're right - there are a lot of smart beta ETFs coming to market. A lot of these are closet index funds, for better or worse. What can the end investor do to make sure they're not getting taken advantage of and getting into the right ETFs?

Kevin Carter: I have to say it's a hard question to answer. Also, I'm a little conflicted. I've just made a case that some of the higher fee offerings are to be avoided, but on the other hand, I have an emerging markets Internet ETF that charges higher than average fees. I think that always being mindful of the fees is important. Certainly, Vanguard, obviously continues to do a favor to investors operating essentially as a nonprofit and driving prices down as much as it can. I think, as I said earlier, I've become a little disillusioned particularly in the emerging market part of the investment landscape, because while the fees are low and the case for indexing is strong, the constituents of the index, the state-owned and government controlled companies are not operated like a traditional western for profit entity. To be frank, I don't have a perfect answer. Always keep an eye on the fees and as Jack Bogle says in investing, "You get what you don't pay for."

Nate Geraci: Kevin, with that, I think that's a good place to leave it there. As always, just an excellent perspective on emerging markets and ETFs as a whole. We greatly appreciate you taking the time to join us on the program today. Thank you.

Kevin Carter: Thanks, guys. Bye bye.

Nate Geraci: That was Kevin Carter, CEO of Big Tree Capital. The ETF is EMQQ, the Emerging Markets Internet and Ecommerce ETF. You can learn more about this ETF by visiting emqqetf.com. That's emqqetf.com.