The Underappreciated Growth Story of Emerging Markets with Kevin Carter

Episode Summary

Executive Summary: Kevin Carter argues that the biggest long-term opportunity lies in emerging and frontier market internet/e-commerce companies, not broad EM index funds dominated by state-owned and legacy assets. He explains how EMQQ was built to capture secular growth from rising consumers, first-time internet users, and mobile leapfrogging, while stressing that growth, compounding, and reasonable valuation matter more than traditional value metrics.

Main Topics: Why traditional EM indexes miss the opportunity (Priority: 5/5): Carter says broad emerging-market ETFs are burdened by state-owned banks, oil companies, oligarchs, and other legacy holdings that dilute the real growth story. He views these indexes as a poor way to capture emerging-market upside. Emerging markets as the world’s growth engine (Priority: 5/5): He frames emerging and frontier markets as the core of global population and future consumers, emphasizing their share of people, youth, and GDP as the basis for a long-term investment case. EMQQ’s thesis: internet, e-commerce, and mobile leapfrogging (Priority: 5/5): EMQQ is built around three megatrends: the rise of the consumer, the spread of computers/internet access via smartphones, and the digitization of commerce and payments in developing economies. Direct indexing and the origins of active indexing (Priority: 4/5): Carter traces the idea of direct indexing back decades, describing it as an early version of active indexing designed to enable customization and tax-loss harvesting in taxable accounts. Growth investing vs. traditional valuation frameworks (Priority: 5/5): He argues that long-duration growth can justify high or even temporarily negative earnings, and that PE-based value frameworks struggle to evaluate modern platform businesses. Risks: regulation, China exposure, and government intervention (Priority: 4/5): While bullish, Carter identifies regulatory and government risk—especially in China—as the main threat, though he believes fears are currently overstated and largely priced in. Building a successful ETF business (Priority: 3/5): He attributes EMQQ’s success to strong performance and a compelling narrative, noting that assets accelerated during periods when the strategy ranked highly and investors saw the growth story clearly.

Key Arguments: Broad emerging-market indexes are structurally flawed because they overweight state-owned enterprises, commodities, and other non-growth legacy assets. Emerging and frontier markets represent the majority of the world’s people and future consumers, making them an obvious long-term source of growth. Internet and e-commerce companies in emerging markets are benefiting from first-time access to computers, smartphones, financial services, and digital commerce. Direct indexing can improve after-tax returns through systematic loss harvesting and customization, especially for taxable investors. Traditional valuation metrics like PE can mislead investors in high-growth platform businesses because earnings may be intentionally suppressed to maximize long-term value. Growth plus reasonable valuation and long holding periods are the path to superior compounding and investment outcomes. China-specific regulatory risk is real, but Carter believes the broader fear around China is excessive and that similar regulatory pressures will appear globally. The best opportunities in emerging markets are often not in the index labels investors expect; some of the fastest-growing consumer businesses are classified as technology stocks. Successful investment products need both performance and a clear story that investors can understand and believe in.

Data Points: Share of world population in emerging/frontier markets: 85% - Carter says emerging and frontier markets contain about 85% of the world’s people. Share of young people under 30: 90% - He says 90% of the world’s under-30 population lives in emerging and frontier markets. Share of global GDP: More than 50% - He says emerging/frontier markets now account for more than half of global GDP. Share of global stock market cap: About 25% - He estimates emerging markets are roughly a quarter of total all-world market capitalization. Regional mix of emerging markets: ~60% Asia, ~20% Americas, ~10% Eastern Europe, ~10% Middle East/Africa - Carter breaks down the composition of emerging markets by geography. Revenue growth of EMQQ sector over 11 years: 37% per year on average - He cites this as evidence of exceptionally fast growth in the internet/e-commerce sector. PE/Growth ratio for EMQQ group: About 0.7 - He says this is roughly half the Nasdaq’s PEG and one-third the S&P 500’s PEG. Historical after-tax outperformance of direct indexing strategy: About 3% per year over 20 years - He says active indexing/direct indexing beat the index by about 3% annually after taxes and fees over nearly two decades. Revenue growth of some individual emerging-market consumer internet companies: About 100% - He contrasts internet names with traditional consumer stocks growing 15-20%. Wuba gross margin: 94% - He uses this as an example of a platform moat in an emerging-market internet company. EMQQ Chinese exposure: 65% - He notes that China is the largest risk because it makes up about 65% of EMQQ. Number of companies in EMQQ/FMQQ universe: 118 - He says the rules-based strategies own every qualifying publicly traded internet/e-commerce company in the universe. 2020 asset decline then rebound: About $300M after falling from about $550M - He describes assets dropping in 2020 before recovering as internet/e-commerce benefited from COVID. Assets growth in 2017: About $50M to $500M - He cites 2017 as a breakout year when EMQQ became a top-ranked fund and assets surged.

Pivotal Quotes: "The miracle of compounding is so important in your ultimate investment outcomes, like so, so important." — Kevin Carter: He explains why long-term growth investing can be more important than short-term valuation concerns. "I think that people that have held on to this Graham and Dodd low price to book approach, they're not going to make money ever again, really." — Kevin Carter: He argues that traditional value frameworks are increasingly ineffective in modern growth businesses. "Buy and hold miracle of compounding is very, very, very important." — Kevin Carter: His closing advice to individual investors.

Implications: Listeners should rethink blanket EM exposure and focus on where real growth is occurring: internet, e-commerce, and mobile-led consumer adoption. The episode suggests future alpha will come from secular growth, not legacy index weights.