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Even as global markets inch towards all-time highs on the improving health of major economies, investors continue to focus on emerging markets. Especially on India, which has attracted nearly $9.2 billion thus far in calendar year 2014. Mark Mobius, executive chairman, Templeton Emerging Markets Group, tells Puneet Wadhwa the coming decades will be characterised by a growing level of per capita income and more market-oriented policies. Edited excerpts:
What is your opinion of the global economy and how that is translating for the developed and the emerging markets?
An improved growth outlook in the US in particu
Those fears now appear overblown. From a liquidity perspective, the US Federal Reserve was not alone – Japan has been implementing its own quantitative easing programme, China’s monetary base is continuing to increase at a rapid rate, and there are signals that the European Central Bank might ease policy further. It is also important to note that the US Fed is not sharply tightening policy to slow an overheating economy – on the contrary, the US economy is essentially coming off life support and the extraordinary policy measures of recent years are being gradually unwound.
Indonesia’s experience illustrates this – after a sharp decline in both equities and the rupiah last year, we have seen a notable rebound in 2014. Foreign exchange reserves have risen back above $100 billion, the currency has appreciated and many of the stocks most heavily sold off in 2013 have seen impressive returns thus far this year. Such outperformance of EMs might continue over 2014.
The MSCI World Index trades at over a 40 per cent premium relative to the MSCI Emerging Markets Index, on a forward price earnings basis, which we do not believe to be warranted by economic fundamentals. As a whole, EMs have higher rates of growth, lower debt and higher foreign exchange reserves. In addition, the reform outlook in EMs is at its brightest in years.
Which regions do you like the most?
We are bottom–up value managers and, hence, what is most important to us are the fundamentals of individual stocks, rather than top-down macro considerations. Our portfolio allocations to countries and sectors are driven by stock selection. Accordingly, we are able to find attractive investments globally, including in countries where negative news flow obscures stock opportunities.
From a global perspective, some of the most exciting opportunities are in frontier markets. These can be viewed as essentially the next generation of EMs and include countries such as Nigeria, Saudi Arabia, Argentina and Vietnam.
What are the key drivers of growth in EMs?
At the forefront are ongoing economic reform and pro-business governments. The euphoria surrounding Modi’s landslide election in India illustrates the impact a change in leadership can have. By contrast, the inverse correlation of Brazilian equities with President Rousseff’s popularity demonstrates how populist government intervention in markets can be detrimental to growth.
The broader positive trends in EMs, relative to developed markets, are higher growth rates, lower levels of debt and higher foreign exchange reserves. These provide a macro economic backdrop, complemented by booming consumer growth.
What does the future hold for EMs?
On current trends, EMs are set to dominate the world economy in the coming decades. We have already seen poverty relief on a scale unsurpassed in history, as the incomes of hundreds of millions of people have risen overt two decades.
The reform outlook in EMs is at its brightest in years. China’s government under President Xi has signalled its intention to embark upon extensive reform. India’s new pro-business government to be led by Prime Minister Modi is expected to launch extensive reforms. In Indonesia, presidential frontrunner Joko Widodo has announced ambitious plans to cut subsidies and increase investment.
We believe the coming decades will be characterised by an ever-growing level of per capita income and more market-oriented policies.
Has the risk of investing in EMs come down in recent years?
This depends on how one assesses risk. The MSCI World Index trades at over a 40 per cent premium relative to the MSCI Emerging Markets Index, on a forward price earnings basis. This, to us, suggests downside risk might currently be higher in developed equities.
We view risk as the permanent impairment of capital, not the day-to-day volatility in markets, which we seek to mitigate with bottom-up fundamental research, supported by on-ground presence in these markets. As value managers, we are often drawn to stocks oversold or unloved by the market – and, as such, maybe exhibiting higher volatility. The key is for that risk to be compensated by our view of potential long-term returns.
What are the differences between the EMs in 1994 and in 2014?
Most important, their size on an absolute and relative basis. China, for example, is now the world’s second largest economy. Per capita incomes have also risen enormously and EMs are now far more integrated into the global economy – indeed, contributing the majority of global economic growth in recent years.
What sectors offer the best investment opportunities?
We see attractive long–term growth in consumer demand throughout emerging and frontier markets. But this does not necessarily mean we focus solely on the consumer sector, where valuations might be elevated, relative to other sectors. We take an unconstrained approach and can gain indirect exposure via banking stocks with strong micro-lending businesses, or the industrials sector in transportation, for example.
