Many investors are wondering about the risk of China’s stock market following a series of crackdowns this year that have erased billions from the value of U.S.-listed Chinese companies.
The latest regulatory move involves a ban on for-profit tutoring which overnight made some public companies almost worthless. For example, TAL Education Group (NYSE: TAL) an industry leader has lost 96% of its value this year.
This spring Alibaba Group (NYSE: BABA) paid a record US $2.8 billion anti-trust fine a few months after an initial public offering by its affiliate ANT Group was halted at the last minute. In June, days after the debut of ride-hailing giant DIDI Global Group in New York (NYSE: DIDI), Chinese regulators ordered the company’s app to be taken down because of security issues.
All of it would seem to be very bad news for an emerging market ETF heavily weighted toward China. But for Kevin Carter, CEO of EMQQ ETF, (NYSE: EMQQ) an emerging market ecommerce and internet fund, it is quite the reverse. Rather than a sign of a Chinese government conspiracy, he sees a welcome sign that regulators are doing their job.
“This is the largest panic I’ve since we launched the fund in 2014,” he admits. “But the American lens is so jaded when it comes to China everything that happens is viewed with mistrust.”
EMQQ has US $1.7 billion in assets of which almost two-thirds are invested in Chinese companies. The fund is down 15% year-to-date at the time of writing and 36% from its February high. In 2020, Morningstar Research ranked the ETF 1st of 796 funds in its category. In 2019 it was ranked 2nd of 835 funds.
In an interview, Mr. Carter talked about the impact of recent regulatory moves and his optimism about China and emerging markets.
His long-time business partner and fund advisor is Burton Malkiel, the Princeton University economist whose book A Random Walk Down Wall Street has gone through 12 editions and sold 1.5 million copies. Mr. Malkiel was an early advocate of index investing and has served on the board of The Vanguard Group.
Q: Why are you bullish on emerging markets?
A: Emerging market consumers are the tip of the spear of world growth. Why? Because the thing that’s emerging is them. Their incomes are growing and they want stuff. More and better everything.
What are the big trends?
Number one is their rise as consumers. Emerging markets have 85 per cent of the world’s population and almost 90 per cent of the young people. The second trend is their use of smartphones. For most of them their first computer is a phone. That’s combining with the third trend which is the availability of the internet. When you put those three together you have enormous power.
They’re leapfrogging traditional consumption and becoming consumers as digital natives. The place you see this most powerfully is in financial services. They don’t have bank accounts or debit cards. There’s no store to go to even if they had a car. It plays out differently in different places, but more than half the mobile pay users in the world are in Africa.
How quickly is this happening?
In the 10 years ended December 2019, the average annual revenue growth in emerging market internet and ecommerce was 38½ per cent. I think it will continue to be the fastest growing global sector.
What is your fund’s strategy?
It’s very simple. If you are an internet, or ecommerce company, in any emerging or frontier market we will buy you as long as you meet our minimums for size and liquidity.
Currently there are 118 of those companies. We have an 8 per cent limit on the largest holding. That’s largely because Alibaba and Tencent are significantly larger than everything else. We rebalance in June and December.
How should investors view recent actions by Chinese regulators?
Regulators have pulled the emergency brake, tightened up the rules, made sure everyone knows them and pushed the restart button. The Chinese understand capitalism better than anybody. They know it works. It has lifted them out of poverty. The problem is that anything to do with the Chinese government becomes a worst case scenario when viewed through the American lens.
So, how do you look at it?
Last November when regulators pulled the Ant IPO, the more I looked at it, the more convinced I was they were right.
The Ant platform sells wealth management and insurance, mutual funds and makes loans. Ant was originating more loans than anybody else in China, but they weren’t regulated like a bank. That made them incredibly profitable but created unacceptable levels of risk.
As well, the entire sector had grown at an incredible rate and regulators were having trouble keeping up with it. So, they pulled the brake. The message was: We’re revising the rules and we’re going to enforce them. It was smart.
What about the latest crackdown on education?
The Chinese place a high value on education. The demographics are such that there are two sets of grandparents and two parents. The child is all they have. So the pressure is super intense with negative side effects: kids spending too many hours a week on extra studying and a wild west show with people borrowing money to pay and cheating scandals.
What’s your outlook for the emerging market ecommerce?
Investors with a three-to-five year time frame will do very well – but not without volatility. We’ve had many 30 per cent declines and we’re having one right now. We will have more, but they’ve always been good times to buy.