The Hindu Business Line : ‘Sub-prime shock element is over’

Bear markets are shorter in duration than bull markets and markets fall by a smaller percentage than the former rises. That’s why one must invest with a long-term view.

DR MARK MOBIUS, MD, TEMPLETON ASSET MANAGEMENT

Emerging markets have regained centre-stage after the recent Fed rate cut, with BRIC stocks posting strong gains. In an interview, Dr Mark Mobius, Managing Director, Templeton Asset Management and the head of its emerging markets team, explains why he retains a bullish stance on the emerging markets, vis-À-vis developed ones.

You have been quoted as saying that the impact of the US sub-prime crisis will be felt over the next three to four years, but that the impact on stock markets is over. Why is that?

Yes, that is because stock market investors are now more aware of the sub-prime problem and thus will invest accordingly. The shock element is over and the market has already discounted the news. As for the real impact of the sub-prime issue, this will slowly filter through the economy.

For example, as a result of the sub-prime issues, corporations are less likely to give out loans as easily as previously, thus having an impact on the demand for housing and subsequently property prices. Moreover, this tightening liquidity could also impact consumer demand which, again, would filter through the economy.

With valuations for emerging markets catching up with the developed markets, are the former unattractive?

I don’t agree with this since it is important to look at investments with a long-term outlook. We project valuations on a five-year forward basis and still find emerging markets undervalued.

We believe emerging markets remain attractive because they offer superior growth coupled with a historically lower risk profile, due to factors such as privatisation and deregulation of key industries, stable political environments, improving corporate governance, enhancement of competitiveness through removal of subsidies and reduction of trade barriers and higher productivity and consumption because of a younger and better trained labour force.

How long will the bull markets sustain?

It is impossible to predict how long the bull market will last. No one can predict the market direction and a bear or bull market could start or end at any time. However, the good news is that bear markets are shorter in duration than bull markets and bear markets fall a smaller percentage than the bull market increases. This is why one must invest with a long-term view.

If the Chinese government keeps tightening the economy, what will happen?

The Chinese government continues to adopt gradual tightening policies which indicates that it does not want to see the economy or stock and property markets collapse. We expect the government to maintain a careful balance between tightening measures and the economy’s advancement.

Why would an investor choose Templeton’s China funds over other peer funds?

One key factor that differentiates Templeton from other managers is our intense analysis on the fundamental value of individual securities and our longer-term outlook. Our goal is to identify those companies selling at the greatest discount to future intrinsic value, which over time will produce the greatest share price returns with minimal risk.

Moreover, the Templeton emerging markets equity team is one of the largest and most successful such teams in the industry. The team was established in 1987 and currently comprises more than 50 investment professionals, including 35 portfolio managers and analysts each averaging more than 10 years with the group.

How long do you expect the growth of China to continue? If China stops to grow at this pace, what signs would we have in advance?

China is only at the beginning of its growth cycle. We can expect growth to remain robust, albeit, at a slower pace than we are seeing now. Signs of slowing growth in China could be lower domestic demand, poor trade numbers, falling property and stock markets, and so forth.

Are Hong Kong and Thailand your most favoured markets in Asia at the moment?

We see value in most markets in Asia, including Thailand, the Hong Kong-listed “H” and “Red-chip” shares, Korea, Taiwan and so forth. We like the Hong Kong-listed “H” and “Red-chip” shares because China’s proposal to allow domestic investors to invest in Hong Kong should drive prices as these shares are trading at relatively more attractive valuations to their “A” share counterparts.

Moreover, expectations of selective “H” and “red-chip” shares to issue “A” shares in the future could further support prices. As for Thailand, while the market has been plagued by political uncertainties since last year, the election of a democratic government later this year could see a shift in focus from politics to the economy.

Thailand is currently one of the cheapest markets in the world and we believe that the medium- to long-term outlook for Thailand remains positive. Our exposure to China is predominantly via the Hong Kong-listed “H” and “red-chip” shares due to their cheaper valuations. We have a minimal exposure to mainland China stocks in our portfolio.

Which markets in Asia are you most bearish on? Why? What would it take to change your minds about those markets?

While we do not intentionally avoid any markets, we currently have minimal exposure to the Philippines due to size and liquidity issues. The country’s high fiscal deficit and poor corporate governance practices also raise concerns.

We believe that acceleration in the implementation of financial, economic and structural reforms is vital to tackle the country’s problems.

The government also needs to clean up the country’s widespread corruption and nepotism problems. Corporate governance also needs to be addressed.

Any comments regarding the recent financial market volatility, especially in markets such as Brazil? Any fundamental reasons? And has it affected your view on the region?

Emerging markets experienced high volatility in August. Widespread concerns over the exposure of financial corporations to US sub-prime mortgages resulted in the drying up of liquidity around the world and triggered panic selling in stock and bond markets.

Although the exposure of emerging markets companies to sub-prime loans was not significant, it did not prevent investors from dumping Brazilian and emerging market equities. Brazilian stocks fell by as much 20 per cent in dollar terms, although about half of the decline was due to a weakening of the Brazilian Real.

A decision by the US Federal Reserve to cut the discount rate by 50 basis points, eventually calmed markets.

The availability of funds from the Federal Reserve to support US corporates alleviated concerns, causing markets to rebound globally as investors hurried to pick up oversold stocks.

Liquidity improved considerably in the later part of the month with markets appreciating as rapidly as they corrected, allowing most markets to recuperate a large part of their losses. Brazilian stocks recovered by about 22 per cent by the end of the month.

Despite the recent volatility, we have not changed our outlook on Latin America. The growth prospects for the region continue to be good. Strong commodities prices associated with a solid domestic demand for goods and services, have been key drivers of economic growth.

What are your views on the Middle East and South Africa region?

On the African continent, companies are rich in commodities and minerals, which are essential to the global economy, and thus these companies continue to perform well. In South Africa, in particular, the good corporate governance standards exhibited by local companies, sound regulatory structures, and efforts to expand their international market share as well as capable management teams can assure investors of finding investment bargains.

A consumer boom, propelled by credit growth and higher disposable income, as well as strong finance, manufacturing, business and construction sectors has led South Africa’s economic growth.

The planned hosting of the 2010 soccer World Cup means that we can expect to see significant spending on infrastructure which could continue to support the country’s growth.

Most countries in the Middle East region have benefited directly or indirectly from high oil prices, either as a producing nation or recipient of petrodollar investments from neighbouring oil producing countries. In addition to petrodollar income and investments, a wave of liberalisation has hit the region and triggered robust economic growth and foreign direct investment (FDI) inflows.

Consumer confidence and domestic demand is also strong. The regulatory environment has improved and the private sector is willing to both invest and innovate. The private sector is constantly increasing and non-oil sectors are growing faster than the oil related sectors.

Several industries are moving up the value chain and are expanding and competing successfully in the international arena. The Middle East, therefore, is a region of great interest to us and will be the focus of continued research from offices in Dubai as well as other offices in the region.

BL RESEARCH BUREAU

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