Q&A: Mark Mobius on Emerging Markets

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Few investors are better placed than Mark Mobius to make sense of the recent turmoil in emerging markets. For more than 30 years, the Franklin Templeton fund manager has been a pioneer investor in the field, riding 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.

Mobius is also the author of The Investor’s Guide to Emerging Markets, Mobius on Emerging Markets and Passport to Profits.

Mr Mobius answers your questions on emerging markets below.

The most thought-provoking online contributions may be published in the Financial Times newspaper, so please supply your full name and location. Please keep questions short and focused. Submissions that are excessive in length will be edited.

(Franklin Templeton may have positions in markets discussed)

Background briefing:

‘Storms ahead’ for emerging markets

Emerging markets bear brunt of sell-off

Emerging with optimism

Emerging markets are vigorous - for now

How much of Mexico’s currency devaluation would you attribute to internal factors, the upcoming federal elections, and external factors, interest rates in the U.S. and elsewhere? Do you expect the Mexican peso to continue its downward trend after a clear winner has emerged from the presidential elections?

Camilo Montenegro, Mexico

Mark Mobius: According to our price parity calculations, the Mexican peso is slightly overvalued against the US dollar. This can be attributed to the steady flow of remittances from Mexicans working in the US as well as exports. The overvaluation is apparently now being corrected but I don’t expect a massive devaluation at this stage although higher US interest rates could put pressure on the peso unless the Mexican central bank raises rates.

What is your view on the dynamics of the emerging markets after 29 June 2006, provided that the Fed increases interest rates by 0.25 per cent?

Evgenia Smerkis, London

MM: The market is a leading indicator so I think another rise in the Fed rate is probably already factored in the stock market prices. The new question, of course, is whether further increases are expected. If so, and if that impacts the US economy then emerging markets would be impacted as will the rest of the world.


China and other countries are pursuing export-led growth by maintaining artificially low exchange rates. This practice is spreading to other countries even as a political backlash seems to be forming in the US and Europe. How do you see this situation resolving?

Brian Shriver, Atlanta, GA

MM: Actually in Eastern Europe exchange rates against the US Dollar are overvalued even though those countries have strong export potential since vis-à-vis the Euro their currencies are not overvalued as much. Also, in Asia, you have seen the Korean Won appreciating dramatically so that we can’t say that it is undervalued against the US$. The general trend is for Asian currencies to be revalued so the artificially low exchange rates are gradually being corrected.


I’m currently focusing on CEE (Central/Emerging Europe), markets that have equally retraced substantially from earlier highs. Other than Hungary, most other markets there are in rather good shape macro-wise, so are we looking at a major opportunity here, or is there more downside to come? Fundamentals would not warrant it I would argue.

Yvan De Munck, New York

MM: The fundamentals in the CEE countries continue to look rather good although as I have said, the currencies seem to be somewhat overvalued. Nevertheless, those countries are benefiting from the inflow of investments from Western Europe and the integration continues. They also benefit from the rising wealth of Russia and thus are able to serve both Western Europe and Russian markets. The opportunities remain but we have to take care that we buy at the right price.


Do you think value investing has a future in high growth areas of the world economy like China and India?

Deepak Puri, New York

MM: Value investing has a place in all types of markets and economies. We must remember that value investing does not ignore the future. Our selection of stocks is based on not only their history of earnings but also what we think they will do in the next five years. A stock that looks expensive now may actually be cheap on a five-year time frame.


Are we in the early stages of a bear market, or have the last four weeks been a minor correction?

Stuart Ferster, UK

MM: No one knows if we are in a bear or a bull market until the price movements are over and that is of no interest to anyone who is trying to time the markets. The key, of course, is not to time the market and to take a long view. If you are trying to predict whether the last four weeks are the early stages of a bear market which will then warn you to get out of the market then you are taking the wrong view. Unless you have a five-year view, the chances of you making a mistake are very great.


Given the recent move in investor sentiment away from risk, and the reduced liquidity brought about by central banks, what prospects are there are for an emerging market recovery this year?

Warren Ludford, Minneapolis

MM: The premise of your questions that there is “investor sentiment away from risk” and there is “reduced liquidity brought about by central banks” has to be questioned. As regards to investor sentiment and risk, investors are all willing to take risk IF the possible returns are great. Just like many people punting on the football World Cup thinking that their team will win and they are willing to put their money to work on that belief, people looking at stock markets continuously take calculated risks regarding the market. Unfortunately too many look at it as a gamble and not as a long term investment and are subject to the popular sentiment of the moment. The second premise regarding reduced liquidity, also can’t be taken at face value since there is plenty of money around but it may not be going into stocks but into bank accounts or bonds. The question is whether people have the confidence in stock markets and emerging markets in general to put their money into such stocks. That is a changing phenomenon which means that liquidity will ebb and flow according to people’s perception and the different expectations regarding earnings yields going forward. Therefore, an emerging market recovery will depend on the spread between emerging markets debt interest rates and US Treasuries since that will reflect the degree of confidence investors have in emerging markets.


Out of all the BRIC (Brazil-Russia-India-China) economies, which economy do you think would perform better? And if we are in a secular bear market, how it would impact emerging equity markets, especially BRIC ones? Which one is most vulnerable and which one is least vulnerable?

Nishant Mehta, France.

MM: Regarding economies, China is expected to be the best performer followed by Brazil, Russia and India in that order. However, that does not mean the stock markets in those countries will perform in that order. Stock markets are leading indicators and their behaviour predicts economic behaviour and not the other way around. As regards to the secular bull or bear market, it is impossible to say until it is all over and then it is too late to help. We therefore have to concentrate on the company fundamentals. Are stocks cheap or expensive relative to their own history, relative to other investment alternatives and relative to their own market and industry? If they are cheap then the possibility of a bull market is very great. The vulnerability of each of the markets depends on the health of the individual companies. In that respect we are finding opportunities in each one of those four areas but more in Brazil and China rather than Russia and India.


How do you see Russia developing itself in the energy sphere? Do you see any rationale in Gazprom’s expansion into European markets by acquiring gas distribution assets?

Vladislav Metnev, Moscow

MM: Russia is continuing to rapidly develop its energy resources as a result of Russia’s own investment and investment on the part of foreign companies. This is expected to give a big boost to output from Russia of both oil and gas. Since Russia is the largest supplier of gas to Europe it makes sense for Russia to move into the distribution business in Europe. This would be good for both Europeans and Russians. For Europeans it will give Russians a stake in the health of the European economies and gas demand and for Russians it will enable to share in some of the profits obtained in the downstream business.


Do you consider that emerging markets equities are, right now, seriously underpriced? If so, do you expect a recovery in the short term, or does this mean a stagnation of prices for a considerable time?

Sebastian Salceek, Rosario, Argentina

MM: Yes, in many cases equities in emerging markets are under priced but this is not true of all companies and markets. Generally speaking, looking at the history as well as comparing emerging markets to developed countries, equities in emerging markets are under priced. As regards to recovery in the short term, we don’t know and can’t predict and also we can’t say that there might be stagnation of prices. However, we can say that there are opportunities to both buy and sell equities in emerging markets and liquidity has improved greatly in recent years so the chances of price stagnation are low.


What is your assessment of latest developments in Turkey?

Mehmet Ufuk Sensoy, Ankara

MM: Turkey has a great prospect for being the link between Europe and the Middle East and the “stans”. The Turkish government has made good progress in following the EU criteria for improving government finances as well as reducing inflation. However, the government has also erred on emphasising religious issues to the detriment of the more secular challenges facing the country and the business community in Turkey has recently commented on that. We think that these problems will pass and the continued progress of Turkey is more likely.


What do you think the impact of petrodollars has been in emerging markets and do you consider this to be hot money?

Justin Willmott, Oxford

MM: The impact of petrodollars in emerging markets has been concentrated in the Middle East markets such as Saudi Arabia, Dubai and Egypt. It has not been so evident directly in emerging markets. However, indirectly, there has been an impact because these petrodollars are invested in mutual funds and other investments which eventually can flow into emerging market stocks. It certainly is a lot of money. You just have to multiply the barrels or oil exported from the Middle Eastern countries starting with Saudi Arabia it by $60 or $70.


Where do you currently see value in emerging markets - countries and sectors? Where would you stay well clear of in the short term?

Iban Ortuzar, Madrid

MM: We see good value in many markets but the allocation of our funds indicates the most favoured countries are: Korea, Brazil China, Taiwan, Thailand, Hungary and Russia. We have been concentrated on the consumer and commodity sectors.


What countries would you not invest in for geopolitical reasons?

David W Roberts, Boston, Mass

MM: We would not invest in any country where there are possibilities of exchange controls which would prevent us from repatriating our funds. Other than that we are willing to look at any country and the degree of investment would depend on the risk/reward balance.


I was just in Boston hearing World Resource Institute CEO, Johnathan Lash, pitch to more than a 100 equity fund managers and select others about what’s possible in the carbon market. However in late April, early May the bottom fell out of this exceptionally new market. What’s your read on it? Are you putting your money in carbon?

Prof. Michael Dorsey, Dartmouth College

MM: We are not putting money in carbon but we do invest in companies that have benefited from the carbon payments. The question at the end of the day is whether real cash outlays will come about if the payments become very large and they certainly could become very large.


Is this a temporary correction in the overvalued commodities market or are the good times over?

Mrs Anu Agarwal, Dubai

MM: We expect that the speculative levels of many of the commodity markets are not sustainable and prices will correct downward. However, those prices will continue to be above their historical average and there will be many opportunities for good profits for companies supplying those commodities.


What are your thoughts on investing in emerging market local currency debt markets, particularly in Asia?

Gregory Salomon, Texas, US

MM: There are good opportunities for investing in emerging market local currency debt markets particularly in Asia because we feel that many of the Asian currencies are undervalued. Also liquidity of the Asian debt markets is expected to improve going forward.


Is this the fastest shortest correction you have seen in emerging markets and if so how long do you expect the downturn to occur? In terms of numbers, by what percentage do you expect emerging markets to fall?

Christopher S. Andoh, Philadelphia

MM: Normally a correction in stock markets in a bull market can be as much as 30 per cent. Of course some markets have gone down more than that such as Turkey while others much less. So we would not be surprised by a 30 per cent move although there is no way to accurately predict it. Yes, this has been fast and short due to high leverage and hedge fund activity which is good since it has also been accompanied by high volumes. This, of course, for bargain hunters enables buying of cheap stocks.


How much is current market volatility being driven by inflationary pressures in turn driven by high oil prices? Given the mismatch of supply and demand for oil is there any end in sight for upwards inflationary pressures?

Dr Malcolm Lyons, Auckland, New Zealand.

MM: There is fear of inflation and thus higher interest rates in the US and that is impacting the psychology of markets around the world since the US economy is the largest in the world. The demand for oil is being satisfied at these prices and the longer these prices for oil last the more oil will be produced because a number of fields that were uneconomic at $20 a barrel are now very profitable. Therefore, we can expect supply and demand to balance out or even get skewed in the other direction. Don’t forget that alternative fuels become more viable at these prices as well. New fields and new alternatives are coming in as we speak and within a year or two you can expect that supply to increase.


Emerging markets are usually lumped together in the popular press and, it seems, by investors during the recent sell-off. When do you think the markets will begin to distinguish between individual countries and which regions/countries are best positioned for the coming 12 month period?

Alex Ezazi

MM: Actually there already is a great deal of differentiation taking place. For example, in this recent sell-off, the Hong Kong market fell by only 10 per cent while Turkey fell by 40 per cent from the peak. Reference is made to the emerging market index which itself is a big simplification and all the markets are bunched together to get an index which makes it easier for people to talk about and on which the popular press can comment. But it is important to drill down to the specific market and, more importantly, the specific company.


FT.com would like to thank Mr Mobius for taking the time to answer our selection of queries submitted by readers around the world. Thanks also to the following readers who sent in questions:

Yasmin Adamali, Kenya

Mohammed Al-Hamaq

Marcelo Almeida, Brazil

Amir Khan

Lise Andersen, Stockholm

Arvind, Mumbai

Alan Au Young, Hong Kong

Daniel Babich, Moscow

Ivan Bahdanovich, Moscow

Siddharth Banerjee, India

John Banwell, Singapore

Jean-Claude Barrau, London

John Blanc, Australia

Catalin Breaban, Fontainebleau

Daniela Carosio, Italy

Dan Carson, USA

David Cee, Beijing

Ed Chappell, Torquay

Phil Charles, Peru

Magashlin Chetty, London

Zahed Chowdhury, UAE

Sheila Chun, Atlanta

John Clayton, Edinburgh

Philip Corsano Leopizzi, Rome

Noel Danquah, London

Salem Darious, Exeter

Joy Desai, Mumbai

Terry Dickenson, Wheelton

Paul Duncan, Newcastle upon Tyne

Alex Ezazi, Los Angeles

Ricardo Franco

Jos Carlos Lopez Fuentes, Mexico

Maximiliano Funosas, Geneva

Luis Gall, Buenos Aires

Leo Gallagher, McLean VA

Gautam, Singapore

Rahul Goel

Gerardo Gruz-Vasconcelos

Sumit Gupta, India

Rajesh Handa, Chandigarh, India

Dudley Holley, UK

Danny Hu, New York

Takashi Ito, Tokyo

Jay, India

Dave Kastner, California

Evariste Katanga, Johannesburg

Ehud Kaufman, Israel

Karn Khandelwal, Delhi

Rolf Klotzbucher, Germany

Peter Koh, Rome

Kostas Kontogeorgos, Athens

Senthil Kumar, California

Flvio Lacerda, Brazil

Carlos Lacouture, London

R T Lavin, Staffs,

Katerina Libermane, Riga

Marc Lieberman, San Francisco

Eric Lim, Kuala Lumpur

Olof Lindstrom, London

Charau Lionel, San Francisco

Clement Loh, Toronto

Peter Lott, London

Dr Malcolm Lyons, Auckland

Christopher McKee

Karthik Mahadevan, India

Karl Mallalieu, London

Joseph Meguerdiche, Beirut

Carlos Monteiro, Portugal

Mavrapostolos Nikos, Athens

Charles Nsekela, Africa

Tris Norriss, Tokyo

Okan, Hope, US

Erwin Palacios, Bogota

Andrew Parker, London

Fernando Primo de Rivera, Madrid

Dr Janak Raj, Mumbai

Sreenivasa Reddy, Bangalore

Ko Roelofs, Netherlands

Simon Romijn

Christopher S, Andoh, Philadelphia

Harshada Sawant, Mumbai

Devindra Sethi, New Delhi

Ankit Shah, India

Uma Shashikant, India

Nikolas Sioris, Greece

John Smith, Sheffield

Annette Solyst, Carteret, NJ

Phalguni Amreesh Soni, Dubai

Stephen, Hong Kong

Barry Stuttard

Allan Taylor, Nottingham, UK

Christopher Teo, Australia

Kennex Tsai, Hong Kong

Rolando Villarreal, Mexico

B Wagner, US

MJ Walsh, California

Roos Willy, Monte-Carlo

Chen Yanhao, US

Yapp Yun Fah, Singapore

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