Templeton Asset Management's Mark Mobius
TIME: As the world struggles with economic recovery, what's happening with emerging stock markets?
Mark Mobius: The emerging markets were hit in 2008 and 2009 by the subprime crisis, then we had this incredible turnaround with markets recovering by an average of 60% in one year, and some markets went up by 100%.
Also, this year, because of this big run up in price you've seen initial public offerings increase dramatically. Last year in emerging markets alone we saw about $95 billion raised through IPOs. This year it's about $144 billion with another $30 billion waiting in the wings, so that puts some downward pressure on the market.
Are their economies in good shape?
Though conditions differ from region to region, on balance the answer is yes. For example, in holdings of foreign reserves, emerging markets have surpassed developed countries. Actually, that began in 2005 and the spread in foreign reserve holdings has just widened.
Also, the Debt-to-GDP ratio for emerging markets is much less than that of developed countries.
Where do things look better than investors think?
Russia is the place to start, because that's where we are finding better values. The biggest challenge facing Russian companies is that many are very leveraged. But that said, Russian banks are flush with cash so I'm hopeful they will extend loans to help these companies restructure. A related bit of good news in this regard, and this holds for many emerging markets, is that interest rates have come down quite a bit, which makes it easier for companies to restructure. While it's difficult to make specific predictions, we would expect an appreciation of the Russian Ruble in single digit terms [over the next year] and an appreciation of the equity market in double- digit terms.
Isn't Russia basically an energy play?
Energy is key because it provides a large part of the government's tax revenue. But Russia has also been aggressively diversifying; they're even looking at developing high tech. Russia is quite ready for this kind of expansion because they are rich in many minerals.
Within Russia we are looking at both oil and heavy manufacturing companies. And then further down the pike we would be looking at consumer goods because per capita income in Russia is higher than, say, China and India. Of course, longer term the bigger potential for consumer products remains India and China, but near term Russia looks very interesting. Russia has many opportunities in the consumer area. For example in cosmetics, Oriflame, the European company, has a large and growing market in Russia.
Moving to Asia, with world growth sluggish are those emerging economies at risk?
China is now the biggest destination for exports from Asia, whether it be Japan, Taiwan, Korea, etc.. With China's growth of 8% to 10%, these countries will tag along. For example, we have major holdings in Thailand, and people say, 'Thailand, what are you thinking' given its political troubles?' But Thailand has been one of the best performing markets this year.
After a big run up, are emerging markets getting richly priced?
Indeed if you look historical valuations, today's numbers are quite high. Looking forward we're more or less in the middle of the valuation range. During the last 25 years the high point for emerging market companies was about 3 times book value, and the low point was about 1 times; we are now at roughly 2 times, so we are in the middle. That's why investors need to be careful.
Africa just had a successful World Cup tournament. What's the investment outlook for that continent?
Africa is going to be a 'frontier' market for quite a while — that's one tier less developed than emerging markets. I think ten years is about right in terms of getting it developed. It's going to take a lot of time because you need to get infrastructure in place. Even South Africa, which has a pretty good infrastructure, is having a lot of difficulty organizing housing and other parts of the economy to meet the expectations of the population. It's going to be a big challenge.
The good news is that countries like China, in particular, but also India and other emerging market countries are finding their way to Africa in search of raw materials, in search of markets. So we're seeing a lot more investment in those countries, which all looks very well for their growth going forward. For Africa as a whole, we are most bullish on Nigeria and Egypt.
Tell me about Eastern Europe. Is the general European slowdown hurting that region much?
Eastern Europe in particular has got lots of pluses. You've got a well-educated population, well-trained population, labor rates are low etc. But they're now suffering a lot of issues of their own making, because their banks were lending mortgages in Yen and Swiss Francs, trying to chase low interest rates without looking at the possibility that their currency would go crashing and their clients would be in big trouble. So they have all these issues to deal with and it's going to take time to work it out. But, again, we're talking maybe 2-3 years. In the meantime there will be selectively, some opportunities in the markets. But it's still a little early for that.
Which Eastern European markets look most interesting now?
Number one is Russia, but then looking at East European countries, Turkey would be first, then Poland, then Romania, in that order.
If we just take a 10-year horizon, what kind of return is reasonable to expect from emerging markets?
There's no way for us to predict what the returns are going to be from a diversified portfolio of stocks. For emerging markets, it's generally been roughly 9%, that's been the average over the many, many years. Of course, there have been years like last year when you could make 60%, but I'm talking about the ups and downs over a long period of time.
And then you compare that 9% average return to what you would expect from developed markets, say 3% or 4%.
So it's a pretty good dollop of extra return
Yeah, there's a pretty good spread. There's no question of that because there's a big spread in economic growth. We're expecting maybe 2% or 3% growth for the developed countries this year and with emerging markets the average is going to be over 5%, so you've already got double the rate of growth in the emerging countries.