Mark Mobius, executive chairman, Templeton Emerging Markets Group at Franklin Templeton Investments, advises investors not to follow short-term movements.
Mark Mobius, executive chairman, Templeton Emerging Markets Group at Franklin Templeton Investments, advises investors not to follow short-term movements and continue to remain invested in equities as emerging markets like India would continue to grow at faster pace, given the future growth potential over the next 5-10 years. Excerpts from his recent interaction with the media:
On bullishness towards emerging markets:
First up, the reason is growth. Emerging markets have grown much faster than other countries in recent years. If you look at the current year, we are expecting emerging markets to grow at 5.9%, compared with the 1.6% growth in developed economies. Secondly, if you look at the foreign reserves of emerging markets, they have been skyrocketing. Since 2005, the emerging market reserves have grown at a faster pace than that of developed markets. Currently, China is way ahead of Japan, which used to have the highest reserves while countries like Russia, Taiwan, South Korea and India have also shown tremendous growth and are still rising, which provides confidence to investors. Then is the low debt in emerging markets. If you look at the debt to GDP ratio of emerging markets, it is going down consistently as against developed markets, where it is rising fast. We have incredible debt levels in developed arena. If you look at the total debt levels, the US and Japan are at the top, while on debt to GDP ratio, some of the European economies top the list and hence pose high risk. Investors have now started to differentiate between the countries. If you look at credit default swap spreads, investors are demanding 9% premium to hold government bonds in Greece, 6.5% in Argentina versus below 2% in emerging markets.
Most of the large institutions have very less exposure to emerging markets at 3-8%. However, the emerging markets have grown at a faster pace and now contribute 32% to the world market capitalisation. So most of the people still aren’t invested enough in emerging markets as much as they should be.
On emerging market valuations:
Many people ask if it is a good time to invest, considering the valuations of emerging markets. If we look at history, the peak valuations at which market traded were in May 2008, where one year forward price to earnings ratio was 28 times while markets were trading at lowest valuations of 8 times in November 2008. Considering this, the current valuations at 11 times on year forward earnings are somewhere in between. Even on dividend yield parameter, we are somewhere in middle of the range for emerging markets. Also, if you look at bear markets in emerging nations, they have been relatively narrow and short in duration than bull runs, which are longer. Among the emerging markets, we continue to have higher weightage on Bric countries, though we are now focusing on Middle East countries as well, where the exposure is quite small.
Often benchmark indices do not provide a true reflection of what is happening in the broader markets and hence we find valuations of several small cap stocks, globally, to be quite attractive as well.
On recent small outflows and risk appetite:
Natural tendency for developed market investors is to stay at home, where you feel safe and are familiar with the conditions. But that is not always the right thing to do, as home markets may not outperform consistently for longer duration. So, it is best to remain invested and have diversified exposure. Also, what we have seen recently is that investors’ risk appetite has not changed much, even in the face of ongoing global events such as tensions in the Middle East and Japan earthquake. Investors are not rushing out and have realised that the pullbacks have been strong and,therefore, tend to remain diversified. We are advising clients to remain diversified and have some exposure to equities, even as there is preference to go for fixed income products offering decent risk-free returns in the short term.
On inflation:
Globally, inflation is on the way up because of excessive money supply situation and will continue to go up in dollar terms. However, if you take the case of countries like India, the government has taken remedial actions earlier than others, but we need to see how it pans out. For countries like India and China, whose currencies are getting stronger due to weakening dollar, you won’t feel the inflation initially as you can buy more commodities, but ultimately you will get hit as these countries try to maintain the exchange rate.
On corruption and rising oil price affecting sentiments:
Corruption is something that is prevalent all over the world and is not a major concern. As far as oil prices are concerned, a 10-15% change in oil prices won’t affect the sentiments of long-term investors as it is a short-term phenomenon.
On major concerns for the Indian markets:
Unemployment remains an issue in certain parts of the country though it is not too much of a worry as the economy is growing strongly. Inflation, particularly food inflation is a cause of concern, as prices of corn, sugar, wheat, soybean etc are going up very rapidly. The whole issue of water is also a concern, as the usage is rising sharply and the availability for agriculture will be a concern in the long run. Also, with a huge proportion of people, in the population pyramid, joining the work stream, consumption rate will go up rapidly. Though execution of projects is a concern, given the complex regulatory structure, there is a lot more transparency coming in recently with huge media attention.
On overweight sectors:
From the Indian perspective, materials, banks, diversified financial and energy are overweights in portfolio. Within commodities, we like oil, prices of which are just shooting up and iron ore — raw material for steel, for which usage is increasing all over the world. We also like copper, palladium, platinum, nickel and coal, for which the general trend is up, as the demand is on uptrend due to higher consumption where as cost of supply is getting costlier. The only commodity that has not moved up much is natural gas, but it is likely to follow soon, given the rise in oil prices.
On avoiding infrastructure stocks:
Companies in infrastructure arena are somewhat opaque and you never know what is happening behind the scenes. But we do have an indirect exposure to infrastructure growth story through commodity stocks.
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