Emerging markets

Mark Mobius, the Franklin Templeton Investments fund manager, will be online for an hour on Monday from 3-4pm GMT to answer your questions in a live debate.

Dr Mobius answer your questions on issues such as the outlook for specific markets, where the investing opportunities are, whether Chinese shares will continue to slide, the progress of the development of corporate government in emerging markets, whether geopolitical risk is rising and strategies for investing.

More background on Mark Mobius

……………………………………………………………………………………………………………………….

Regarding geopolitical risk in emerging markets, what are some of the flashpoints you see for 2007 and onward?
Stacy, London, UK

Mark Mobius: The flashpoints would be as follows:

• A dramatic change in political direction in any of the major emerging markets such as Russia, China, India Brazil, S. Africa, Turkey etc where the government turn their backs on a market economy model and continued liberalisation. This of course will cut the fund flows into those markets and will result in slower economic growth overall.

• Continued presence of the US in the Middle East and, more critically, an increase in that presence without the cooperation of European and other allies.

• Slowdown of the U.S. economy and therefore a slowdown in US imports.

• Rising protectionism globally.

……………………………………………………………………………………………………………………….

In around May 2006, you mentioned exercising caution when investing in India. Given that the prospects for the Indian economy are bright, and the BSE has shown that it can weather storms (notably the May 2006 slide), do you still subscribe to that view?
Ms. Gauri Khanna, Geneva, Switzerland

Mark Mobius: We continue to believe that, overall, the Indian market is expensive. However, we continue to purchase stocks in India and are finding some investment bargains. Please remember that when investing globally we are always comparing one company in India with a company, say, in China or Russia or Brazil. We want to buy those companies who are cheap in valuation terms.

……………………………………………………………………………………………………………………….

Could I please have your thoughts on Pakistan as an emerging market in light of the recent increase in weight given to the country in the MSCI EM index and a surge in foreign investment into the country?
Khaleel Anwar, Pakistan

Mark Mobius: We are investing in Pakistan and are finding some good investment bargains there. It looks like Pakistan is beginning to “catch up” with the market growth of other emerging markets.

……………………………………………………………………………………………………………………….

Now that many of the obvious emerging markets are well represented in terms of fund choice (China/India/Russia for example), where do you feel will be the next set of emerging markets to ‘explode’ (Vietnam is one being suggested by some)? Also how does a private investor gain access to these more obscure markets?
Richard Taylor, Midlands, UK

Mark Mobius: We invest in all the emerging markets and now have investments in 33 emerging markets around the world. There are many more markets where it is possible to invest and where we, in the past , did invest or are now investing: Jordan, Egypt, Morocco, Kenya, Ghana, Namibia, Vietnam, Cambodia, etc.

Private investors will find it difficult to gain access to those markets safely and efficiently. Therefore it is best to invest through a diversified fund which has access to those markets. Our new Templeton Small Cap Fund can invest in those smaller markets and strategies for investing.

………………………………………………………………………………………………………………………….

Are you looking at any of the Caspian Sea countries, such as Azerbaijan and Kazakhstan?
Michael Barr, Bedminster, NJ

Mark Mobius: Yes we are looking at Kazakhstan and other countries in the Caspian Sea. Currently they do not constitute investment bargains but as they develop we expect there will be opportunities.

………………………………………………………………………………………………………………………….

Any views on investing in Cambodia and what is the best way of doing it?
Jeremy Tucker, Bournemouth, UK

Mark Mobius: I just returned from Cambodia and was very impressed. They don’t have a stock market so you have to invest indirectly in companies with assets in that country. We recently purchase shares in Naga Corporation which is listed in Singapore but has all its assets in Cambodia.

………………………………………………………………………………………………………………………….

Is Africa really benefiting from China’s FDI?
Kinga Zwiazek-Lodge, London

Mark Mobius: I’m now in South Africa and the word here is that Africa is benefiting from a surge of Chinese foreign direct investments. The Chinese are paying a great deal of attention to Africa. The Chinese Prime Minister visited Africa over eight times in the last year.

This is an indication that China is going to be more and more active in this part of the world. The have already done 16 investment deals worth $1.9bn in addition to $3bn in preferential loan concessions. Also $2bn in buyers credits. They have targeted $100bn in bilateral trade by 2010.

………………………………………………………………………………………………………………………….

Are emerging market valuations and in particular that of India and China at reasonable levels? Is there adequate margin of safety to enter these markets at current levels?
Manzur Mahmood, Bahrain

Mark Mobius: Valuations in both India and China have gone up so the margin of safety has of course declined. However, we continue to invest and find specific bargains in both countries but particularly China.

………………………………………………………………………………………………………………………….

You say the role of emerging markets in globalisation is significant. Is that true for the markets like Ukraine, Belarus (still very closed country), Moldova, Bulgaria etc? (meaning the east of eastern Europe). What can be the role of these countries (especially of Ukraine) for the world economy?
Elena Shkarpova, Ukraine

Mark Mobius: The role of countries like Ukraine, Moldova Bulgaria, etc will be expanding as they move away from Russian domination and enter global markets. Bulgaria and Romania are already part of the European Union so they will be playing a more important role in what happens in Europe generally.

Ukraine is also moving towards Europe and represents a very important country in terms of agricultural, mineral and human resources.

………………………………………………………………………………………………………………………….

How do you view the Casablanca Bourse in 2007?
Ben Satti, Morocco

Mark Mobius: In the past we were invested in Morocco and would like to re-enter that market. The problem is liquidity and finding inexpensive stocks.

………………………………………………………………………………………………………………………….

I’m currently interested in investing in agricultural land in South America, as I feel it is undervalued and a future breadbasket of our ever growing population. What is your opinion?
Mark Turner, Peru

Mark Mobius: Yes, there is a good opportunity in agricultural produce going forward given the rising living standards globally and the demand for those commodities, particularly in India and China. You must take care to ensure that you (1) hold strong and secure title to the land and (2) get good managers able to work the land and get it to produce high yields.

………………………………………………………………………………………………………………………….

There has been some news about the investment potential of North Africa and particularly about Algeria and Libya. What are your views on the region and specifically on these countries?
A Boulsien

Mark Mobius: Yes, that region is rich in gas and other resources. In addition its proximity to Europe and the Middle East presents a unique opportunity for increase trade and investment.

………………………………………………………………………………………………………………………….

What do you think of the insurance market in Brazil?
Aileen Sheehan, Ireland

Mark Mobius: Brazil’s insurance market holds high potential in view of the fact that the penetration of a number of insurance products is still low.

………………………………………………………………………………………………………………………….

Do you think the current wave of re-nationalising industries in emerging markets in Latin America and Russia will continue? And how can investors benefit?
Gregory J. Buja, Washington DC

Mark Mobius: We think that in such countries as Venezuela it will continue as well as, selectively, in Russia. The good news is that this trend is not evident in other major emerging markets and they is good. Investors can benefit from re-nationalization if the governments concerns are willing to pay market prices for those assets.

………………………………………………………………………………………………………………………….

Given the rise in neo-socialism in Latin America (Nicaragua, Venezuela, Ecuador, Bolivia et al), has your view of the economic future for the region changed?
Edwin Amaya, Boston, MA USA

Mark Mobius: No our view had not changed. Those markets are rather small and do not figure significantly in capital market developments in Latin America. In the large markets like Brazil, Mexico, Chile and Argentina there is no sign of a neo-socialist move but in fact they are moving inexorably towards further liberalisation.

……………………………………………………………………………………………………………………….

Is it possible for Russia as an emerging market to enjoy (in monetary terms relative to GDP) the same levels of foreign portfolio investment as China in the next two to five years?
Andrey, Moscow

Mark Mobius: Yes, it is possible for Russia to have the same levels of foreign portfolio investment but it is rather unlikely if current trends persist since the Russian government would like to control a great proportion of the large companies. In fact, the government is buying back a lot of assets formerly privatised.

……………………………………………………………………………………………………………………….

What is your current outlook for the Malaysian stock market? What would be your investment strategy be if you only have $10m to invest and thus do not have the size constraint?
SK Tan, Hong Kong

Mark Mobius: Our outlook for the Malaysian stock market is good in general That market has been rather dormant for a number of years but now is waking up. If we had $10m to invest we would do the same thing we are doing with the $33bn we are now investing. With the increased size and liquidity of market we are not finding size a constraint.

……………………………………………………………………………………………………………………….

What are your basic investment criteria before you think a particular stock is worth a second look? How important is the tangible asset back-up in minimising the downside risk?
Robert Tan, Malaysia

Mark Mobius: We look at a number of ratios and factors. Most important are P/E, P/BV and P/NAV, Debt/Equity and Dividend Yield. Along with those, profit markets, return on equity and return on invested capital are important. Tangible asset backup does minimise downside risk but you must be careful about asset values since they can change.

……………………………………………………………………………………………………………………….

How much of the heightened economic activity in emerging markets do you ascribe to real estate ? Clearly in India at least the unlocking of the real estate sector has provided fuel to several sectors which has led to increased valuations.
Bala, Mumbai, India

Mark Mobius: A lot of heightened economic activity can be attributed to real estate simply because a rise in real estate prices provides a base for investors leverage into capital markets. They feel richer and are able to borrow against the real estate to invest in the stock and bond markets. Also this heightens the propensity to consumer.

……………………………………………………………………………………………………………………….

There is a huge speculative bubble in China which has led to irrational exuberance, a term used by Alan Greenspan to describe the over-valuation of shares in the US in the 1990s. Do you think investors will continue to enjoy these capital gains in China for much longer? And how would you assess the political risk in China?
John Jose, London

Mark Mobius: Yes, it appears that China is now experiencing a speculative bubble in the A share domestic market. However, the H shares in Hong Kong are selling at considerable discounts to the A share market in China. When you have a very optimistic situation the bull market can continue for quite some time so it is dangerous to predict what will happen in the short term.

One thing is clear, bull markets always end in bear markets. However, the good news is that bull markets last longer than bear markets and bull markets go up in percentage terms more than bear markets go down.

……………………………………………………………………………………………………………………….

I have read that Serbia, Croatia and Bulgaria are seriously becoming undeniable emerging markets. What is your opinion about those countries and their markets?
Brasco T, Rotterdam, Holland

Mark Mobius: Yes, Serbia, Croatia and Bulgaria are definitely emerging markets. We have had investment in Croatia and made a considerable profits from those investments. We continue to look at those markets.

……………………………………………………………………………………………………………………….

What is your view on the African financial markets? I am planning to set up the Congo Opportunity Fund to support the DRC in its economic recovery on the back of its mining resources. Can a portion of this fund be raised on the equity markets outside Africa?
Evariste Katanga, Johannesburg, South Africa

Mark Mobius: The African financial markets, particularly South Africa are very attractive. There is growing interest in the Congo and in other parts of Africa. The key concern revolves around continue political instability and particularly high corruption which makes it difficult of not impossible for foreign investors to commit funds with a guarantee of exit.

Economic recovery in the Congo will ride on the back of the reform horse. Reform of government. Reform of the legal system. Reform of the police. Reform of the military. There, of course, will be possibilities of raising money in equity markets outside of Africa. It is being done every day for other parts of the world.

……………………………………………………………………………………………………………………….

Do you subscribe to the buy-and-hold investment strategy? When do you sell?
Tan Siang King, Singapore

Mark Mobius: Yes, we subscribe to a buy and hold strategy with low portfolio turnover. We sell when the stock reaches our Sell limit determined by our team of analysts.

……………………………………………………………………………………………………………………….

Will your funds keep investing in Turkish stock market in 2007? What do you think about Turkey’s strong exchange rate and high real interest rate policy?
Ufuk Fuat, Turkey

Mark Mobius: Yes, we will continue to keep investing in Turkish stocks in 2007. Turkey exchange rate is somewhat overvalued against the US dollar.

Nominal interest rates in Turkey are very high and this is because the government is fighting the high inflation rates. Those high inflation rates are attributable to high oil and gas prices. The result of this has been a situation where the “carry trade” (foreign investors borrowing low interest yen or euro and then placing deposits in Turkey to get the high rates. This, of course drives up the exchange rate.

Long term, the high real interest rate policy is showing signs of abating as inflation begins to decline. Of course the inflation target is about half of where it is now so a lot has to be done to bring it down. Thus we can expect continued high interest in the short term. Once elections are our the way we expect the Central Bank to accommodate the falling inflation rate by adjusting the interest rates downwards.

The key fact is that Turkish stocks are inexpensive and they are growing at a good pace with excellent management in many cases. As interest rates come down domestic sales and export sales will improve. The Turkish banks continue to raise their loan growth despite the high interest rates and thus their profits are rising.

……………………………………………………………………………………………………………………….

What do you rate as the best emerging market at the moment and what is your basis for the judgment?
Michael Dowling, London

Mark Mobius: Please let me rephrase that question since it is difficult to give only one market as our favourite market. But let me give what are our favourite markets:

• South Africa (where I happen to be now)

• Korea

• Taiwan

• China

• Turkey

Those are the markets where our funds have heavier weightings vis-a-vis our peers or the indices. We judge markets on the basis of how cheap they are. We want stocks that have low price/earnings ratios, high earnings growth, low price to book value and high dividend yields.

……………………………………………………………………………………………………………………….

Background

After hitting record highs in 2006, emerging markets continue to make strong gains overall in this year. While some markets like China and Venezuela have suffered setbacks, others have continued to scale new peaks. One of the pioneers of emerging markets, Mark Mobius argues that the strong run should continue.

For more than 40 years, Dr Mobius has ridden the ups and downs of emerging markets in search of undervalued companies that benefit from long-term growth of their economies.

Though technically based in Singapore, Mobius has led the way as an itinerant investor in the era of market globalisation. He is constantly on the move, spending an average of 200 days a year jetting around the world from Mexico to the Middle East in search of undervalued companies.

Dr Mobius says expectations of a soft landing in the US economy, a pause in US interest rate rises and an improved global environment should support emerging markets.

“The role of emerging markets in the global economy has grown significantly in recent years and we expect this trend to continue in the future. While companies have recorded significant price appreciation, corporate earnings have also increased allowing valuations to remain attractive,” he says. “The opportunities are plentiful with strong fundamentals supporting the long-term uptrend of these markets. Moreover, many companies are experiencing strong growth and there are many upcoming IPOs in markets such as China and Russia which warrant attention.”

Dr Mobius says correction in oil prices in the last few months has affected oil-exporting markets such as Russia and Mexico. However, he expects oil prices to remain firm because of geopolitical and bottleneck problems.

Dr Mobius will be online for an hour on Monday from 3-4pm GMT. He will answer your questions on such issues as the outlook for specific markets, where the investing opportunities are, whether Chinese shares will continue to slide, the progress of the development of corporate government in emerging markets, whether geopolitical risk is rising and strategies for investing.