Mark Mobius: Emerging markets Q & A

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The paragraphs below come courtesy of Mark Mobius, emerging markets guru and executive chairman of Templeton Asset Management.

At what stage of the economic cycle do you think the global market is at now? Why?
On a global basis, we are still at an early recovery stage. However, it is important to look at each country individually since not all economies are at the same phase. While some developed markets are still lagging, many emerging markets have recovered. In fact, there was no recession in some parts of the world so it is important to look at each individual country. For example, in Brazil, economic growth has continued at a high pace while standards of living also increased. This was also true for China.

Why do you think the global economy will not suffer a “double-dip”?
We believe a double-dip scenario is not likely right now because of the sustained growth in money supply. The U.S. government is already poised to embark on “Quantitative Easing 2” at the first signs of a faltering economy.

Taking a 10-year view, do you expect to see a period of high inflation as a result of the enormous money supply in the global economy?
Much will depend on the will of governments around the world to withdraw liquidity when inflation kicks in. Historically, governments have a tendency to act slowly so we should expect a period of rising inflation in the next 10 years from the current low base.

How do you see the next 20-30 years changing the Top 10 list of richest countries in the world?
We can certainly expect to see more of today’s emerging markets in that list. Many of the fast growing countries in emerging markets such as China and India could continue to power ahead and become very rich. As such, we will continue to position our funds to include the best investment opportunities across all emerging markets.

Are markets “decoupling”?
All countries today are inextricably intertwined through trade and communication in one form or other. Therefore, it is not realistic to say that one country or one group of countries is decoupled from another. However, that does not mean that they must move in the same direction at the same time or pace.

Will emerging markets continue to exhibit high volatility?
All markets, including emerging markets, will continue to exhibit high volatility. With short selling, naked short selling, growing derivatives and the expansion of markets globally, volatility will be with us for some time to come. Derivatives, for example, are now valued at over US$600 trillion, more than 10 times the total global GDP.

Some analysts say that gold is the only safe heaven when there is a huge uncertainty in the market. Do you agree? Why?
Historically, gold has not been a good store of value. However, in the highly uncertain environment that we live in today, investors generally feel safer holding gold compared to cash. If money supply continues to grow at the rate of recent years, gold is likely to continue its strong run. Other commodities such as palladium, platinum and silver should out-perform as well. However, during times of massive uncertainty, we should not overlook equities. History has shown that buying stocks in times of maximum pessimism often lead to the highest rewards when stability returns.

Do you think this is a good time to invest in equities? If so, what areas should one focus on? Also what returns can one expect?
There is no such thing as a good time or a bad time to invest. There are always bargains to be found in stock markets. The key of course, is to do detailed research to seek out these bargains and to buy them with a long-term view. We believe emerging markets continue to offer investors compelling opportunities. There’s no way for us to predict what the returns are going to be from a diversified portfolio of stocks. However, looking back over the last 10 years, on average, emerging markets have significantly outperformed developed markets.

Why should investors include emerging markets in a diversified portfolio?
Emerging markets offer attractive investment opportunities because of the (1) relatively higher GDP growth in emerging markets, (2) accumulation of foreign exchange reserves which puts emerging economies in a much stronger position to weather external shocks, (3) relatively lower debt levels of emerging market countries, (4) growing investor confidence in emerging markets (5) strong fund inflows into emerging markets, (6) search for higher returns in the face of low bank interest rates and most importantly, (7) undemanding valuations.

Moreover, institutional investors on average allocated approximately 3-8% of their portfolios toward emerging markets in 2009, while emerging markets represented about 30% of the global market capitalization. This differential leads us to believe that the potential demand for emerging market investments is likely to be significant. We expect to see more money being directed into these markets in the future as investors realize that they may be able to buy good value at reasonable prices with relatively lower risk, compared to developed markets.

Source: Mark Mobius, Franklin Templeton Investments – Emerging Markets Overview, September 13, 2010.

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