Q&A on emerging markets with Mark Mobius

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I have been positive on emerging markets for a while, maintaining that especially China and other Asian countries, as well as resource-based Latin American countries, would we the leaders of the economic recovery and stock market performance in the next upswing. These views are supported by a recent Q&A with Mark Mobius, Templeton Asset Management’s emerging markets guru, as published in the company’s Market Views newsletter.

What’s your assessment of the global economy?
The global economy is in a situation where individuals, companies and economies are in a strong position to overcome the global crisis with support from their governments and central banks. We also believe that emerging markets will play a much greater role in the global economy. Countries such as China and India are expected to emerge as leaders due to their relatively stronger macroeconomic and financial positions.

In which regions are you most optimistic about investment opportunities?
Since it’s usually possible to find at least a few bargains in most markets, all emerging market regions are looking exciting. While global growth has slowed, emerging markets are still expected to grow at a much faster rate than developed markets. The accumulation of foreign exchange reserves also puts emerging economies in a much stronger position to weather external shocks with reserves, for example, in China, totaling nearly US$2 trillion. More importantly for us as value investors, the current valuations of emerging markets are attractive. Certain countries such as Turkey and Russia are now trading at single-digit price to earnings ratios.

Asia is the largest emerging market region in the world. Asian countries are also growing relatively fast. They include countries like China and India with very large populations whose per capita income is growing, and capital markets in those countries are undergoing rapid development. Economic growth remains relatively high, per capita incomes have been rising, valuations remain attractive and reforms continue, thus improving the region’s business and investment environment.

Valuations in Eastern European markets are also attractive, very attractive in some markets such as Hungary and Turkey which are trading at low single-digit P/Es. Poland is one of the few countries in the region that is expected to record positive GDP growth in 2009. Its valuations are, however, are not as attractive as some of its regional peers. Russia is another interesting market. With its huge land mass, large population and abundant natural resources, the country could become one of the fastest-developing economies in the longer-term.

Most Latin American economies are faring relatively well taking into account the current global macroeconomic conditions. There are selective countries which are more prone to the global downturn. For example, Mexico, but greater inter-regional trade has offset some of the adverse impact of lower export demand from the US. One of the region’s main attractions is its huge consumer market with pent-up demand for goods and services and world-class companies that are at the same time under-leveraged and inexpensive.

In addition, the region’s natural resources are among the largest in the world. Countries such as Chile and Peru which are among the world’s leading copper producers. Mexico is a net exporter of oil. Brazil is a major exporter of iron ore, and soft commodities such as soybeans and coffee as well. Colombia also exports commodities such as oil, coffee, coal, and so on. While commodity stocks have been negatively affected by the recent decline in commodity prices, many companies are still profitable at current price levels.

Also, frontier markets, which are the emerging markets of the future, are starting to look interesting. For example, the Middle East is of great interest and we believe the potential for economic growth and development remains considerable, especially if the current trend toward the implementation of political and economic reforms remains on course. Africa is another area we’re excited about. In addition to South Africa, regional economies are also beginning to look attractive.

In your opinion, what are the biggest threats to the global economy?
– loss of confidence
– excessive or poor regulation
– adoption of protectionist measures
– abandonment of the market economy philosophy

Why are you so positive about the outlook for emerging markets?
One key reason is the rapid growth of money supply, not only in the US but all over the world. Governments are trying their best to avoid deflation by pumping money into the economic system. This money must find a home and current savings interest rates, for example, for the US dollar, is not very warm and cozy. Investors have already begun to show renewed confidence and are seeking better returns. The obvious choice is equities. Specifically for emerging markets, we are optimistic because emerging markets:

- are undervalued, trading at extremely attractive valuations and have strong fundamentals
– have undervalued domestic currencies
– are expected to grow, in aggregate, faster than the developed countries
– will emerge as leaders due to their relatively stronger macroeconomic and financial positions.
– have strong holdings of foreign reserves, allowing them to better withstand any external shocks
– follow prudent fiscal policies
– have expanding trade and economic relations with each other; lowering their dependence on developed markets
– represent a huge consumer market as well as a large labor force
– have abundant natural reserves in countries such as Russia, Brazil and South Africa
– have strong potential for development in areas such as infrastructure

Source: Mark Mobius, Templeton Asset Management – Market Views, May 12, 2009.

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