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Readers? Questions Answered Part VI
It?s been a while since I answered some readers? questions. Questions addressed: What are your main criteria when picking a sector and the company in a particular sector? Most of the small companies in India are family-owned. Does this create a problem? What are your thoughts on Africa? What is your view on the Baltic States? Which sectors do you think are the most interesting? What is your view on the Brazilian and the Mexican equity markets for 2011?
Emerging Markets Vision 2020
There will always be unforeseen factors and circumstances that might become catalysts for greater changes in the global landscape, as we have seen from the current unrests in the Middle East.. No one knows what will happen in the future, but below is some of what I envision for the emerging markets landscape in the next decade.
Asia Insights from EM Analyst Conference
Many tend to focus on China and India, the two rising Asian economic powers, and there are reasons why we believe both, which are currently among the top five largest economies in the world will likely be among the top three in 2020. Land and labor costs remain cheap in China. In addition, the country appears to have a competitive edge in terms of work ethics, relatively flexible labor laws and excellent logistics. India?s strength is in its young, growing and increasingly well-educated population, which is fluent in English. This has enabled the country to become a leader in IT consultancy.
India: Kingdom of Dreams
Throughout my travels, I have visited some countries that never cease to amaze me every time I go back, and India is definitely one of them. The country is changing and growing at an incredible pace. In 2010, India?s economy grew by 9.7%, and for 2011 the IMF projects GDP growth to be 8.4%. From 2005 to 2010, India?s economy grew around 6% to 8% each year, an impressive feat for such a large economy. Looking ahead, from 2011 to 2030, EIU forecasts GDP growth to average 6.5% a year, which would make India the fastest-growing large economy in the world during that period.
Stock markets in Egypt have been closed since January 30 and those in the Middle East/North Africa (MENA) region declined substantially between January 25 and February 1 as sentiment among some investors turned negative amid the political uncertainty. Other investors have been seeking an opportunity to buy stocks at low prices. The geopolitical ramifications of this unrest are many, not only for Egypt but also potentially for the rest of the world, and for the most part will probably be positive since political reform has been long overdue in the region.
A Unique Offering in Bucharest, Romania
One of the clearest symbols of a market economy is the stock exchange. The Bucharest Stock Exchange (BVB) was inaugurated in 1882, but it was closed when the communist regime took power after WWII. In 1995, the exchange reopened, listing only six companies and holding just one weekly trading session. Less than 10 years later, by the end of 2004, things had changed quite a bit?with more than 70 listed companies and regular daily trading, the market?s capitalization stood at about 17% of Romania?s GDP. Unfortunately, this impressive start was not followed by additional growth.
Addressing Concerns about a Two-Track World
I recently had a conference call with our investors around the world. Depending on where they were from, some of them were concerned about inflation while others were worried about sovereign debt problems. Here are a few topics that we discussed.
Digging for Hidden Gems Among Small Caps
Small-cap companies in emerging markets are generally under-researched and not as established as their large-cap counterparts. Some have very short track records, not much background and little publicly accessible information, therefore presenting a higher level of perceived risk and deterring many investors. But for these very reasons, share prices of small?cap companies are less likely to reflect their true value with fewer analysts covering them, thus creating attractive investment opportunities.
Descending a Mine Shaft in the Kazhakstan Steppes
Kazakhstan is becoming increasingly important to us as an investment destination. It has vast natural resources such as oil, gas, copper, uranium and a host of other minerals. As a result of the billions of dollars pouring into the country to develop those resources, we believe Kazakhstan has become the economic engine for Central Asia. We have been investing in both the petroleum and mining sectors in Kazakhstan, and the purpose of this visit was to take a closer look at the mining sector.
Emerging Markets in 2011 ? Strong Economies, Rising Prices
I believe emerging markets are now in a secular bull market, and as discussed below, I expect this trend to continue into 2011. Even more money is likely to be directed into these markets as investors around the world realize that emerging economies on average are growing three times faster than developed economies, and generally have more foreign reserves and lower debt-to-GDP ratios than their developed counterparts.
A Notable Year of Emerging Market Growth
I view 2010 as a year of economic resurgence. Many emerging markets recorded strong GDP growth as they continued to recover from the impact of the 2008 financial crisis. In several cases, robust domestic consumption, government expenditure and intra-regional trade offset weak external demand from developed markets. This led many countries in Asia and Latin America to return to pre-crisis growth levels much faster than expected. China and India were among the world?s fastest-growing major economies during the year, with China overtaking Japan as the world?s second-biggest economy.
Rebalancing the World
We are currently witnessing a largely one-way flow of capital, as money moves from countries of disinflation or deflation to countries with inflation, possibly perpetuating the situation for both. We need to see a rebalancing of the world economy. In recent history, financial authorities in the developed world have encouraged a period of easy credit and loose monetary policy, driving a debt-fuelled rise in consumption. There needs to be more ?balance? in the world economy, so high-savings countries should spend more and develop their own vibrant domestic market as we see in the U.S.
Update on Korea
Our investment philosophy has always been to focus on the long-term opportunities and prospects, looking beyond the short-term market distortions or ?noise?. We remain positive on the outlook for South Korea as the country has continued its growth despite the geopolitical concerns.
A More Integrated Latin America
Chile, Colombia and Peru are planning to integrate their stock exchanges, providing local investors with more investment opportunities and also allowing companies to access a broader investor base. We are likely to see increased foreign investor participation with improved liquidity. Once fully integrated, this new regional exchange should have the highest number of issuers in Latin America (before Mexico and Brazil), the region?s second-largest market capitalization (after Brazil) and its third-largest trading volume (after Brazil and Mexico).
A Tale of Two Countries
Argentina?s economy has been growing at a steady pace since the 2001-2002 economic crisis, typical of a recovery following a period of depression. The country has also benefited from a global environment that has allowed it to enjoy the best terms of trade in more than a century. While the external environment remains favorable, adjustments are needed to sustain Argentina?s economy in the long run.
Leadership Changes in Latin America
In Latin America, we are seeing a large and young population moving up rapidly to the new ?consumer? middle class, but at the same time having one of the lowest loan penetrations in the world. The rise of this consumer middle class and growth in per capital GDP is resulting in an increase in domestic spending, which drives the domestic economy. Secondly, the region has vast resources available at low cost.
Reflections: Venturing into a New Frontier
Frontier markets are the next emerging markets. These economies are more domestic-oriented, with a limited number of publicly listed companies; hence, frontier market investments tend to be primarily limited to private equity. Quality of company management is a frequent concern. Frontier market investing therefore often requires additional time and due diligence to assess the quality of corporate management teams, including more frequent on site visits to evaluate businesses effectively.
Malaysia: Respecting History, Embracing the Future
As an emerging market, Malaysia presents itself as a very attractive investment destination today. The Malaysian consumer and commodity stocks are attractive and interesting. I am expecting a domestic GDP growth of 6% this year.
Privatization in Romania
Privatization would help the Romania market become more liquid, efficient and productive. Greater transparency, higher reporting standards and more opportunities to invest could attract both local and foreign investors to the Bucharest stock exchange. The market is currently dominated by Romanian residents, who made approximately 70-80 percent of the exchange's trade volume in 2009, but foreign investors play an important part as well. Although they accounted for only 20-30 percent of trades that year, they are often seen as trendsetters.
China: A World-Class Act
Investors in China continue to be concerned about overheating in select sectors, greater inflationary pressures and a widening wealth gap in the country. The Chinese property market, however, is deep and varied, average household leverage is substantially lower than that in the U.S., and the Chinese government has been quick to act to prevent bubbles. While consumer price inflation continues to rise, producer price inflation has begun to subside. Finally, the recent move to increase the flexibility of the renminbi will allow for a slight appreciation.
What are Essential Factors for Japan to Return to its Status as the Rising Sun? (Part 2)
Japan's immigration policy needs to loosen up to help lower labor costs. In addition, the government needs to reduce spending and taxation so that local small and medium-sized enterprises can grow by expanding into the rest of Asia and to business in places such as China, India and Indonesia. That's because small and medium-sized enterprises are a crucial part of the economy that help to create new business and enterprises. In order for those to flourish, the Japanese government must reduce its role in the economy.
Can Japan Make a Comeback?
It seems that everyone is back to moaning and groaning about the Japanese economy. Modest 3 percent GDP growth is expected in Japan this year, compared to a disastrous 5 percent shrinkage of the economy in 2009. Japanese exporters say they are hurting from a strong yen, while the importers are having a field day. While it's true that the Nikkei 225 Index has fallen from a high of 25,000 in 1991 to a low now of less than 10,000, bargain hunters would say that this is beginning to make the Japanese stock market look reasonably cheap.
Learning From Past Crises
Although it is unrealistic to assume that the structural changes implemented in some emerging markets can completely shield them from the effects of future global crises, they seem to have borne the most recent global financial crisis reasonably well. While risks have not disappeared, things look a lot better today than they did 20 years ago. The growing use of derivatives contracts is just one of the many reasons to remain cautious, but some emerging markets' strong fiscal health is cause for hope and optimism.
Private and Public Sectors ? Motivating and Regulating Markets
Even though the government and the private sector have different roles in society, Mobius believes both must depend on a capitalist philosophy in order to be successful. When capital is raised, be it from taxes or from the savings of individuals for investment, it must be put to productive use. A free market model with an ineffective umpire, inadequate regulation and an uneven playing field is likely no better than a government-led model with no real capitalist system of incentives to maximize productivity.
Russia: Insights from Templeton?s Emerging Markets Analyst Conference
Russia was one of the hardest-hit countries during the recent global economic crisis, largely due to its huge dependence on commodity prices. The worst, however, is over. We already saw a sharp recovery for Russia's GDP growth recently when commodity prices stabilized. The Russian oil supply experienced significant growth in 2009, taking most forecasters by surprise. The International Monetary Fund is even more optimistic about Russia's growth, expecting the country's economy to grow by 4.3 percent in 2010 due to rising oil prices and an improving fiscal outlook.
The Emerging Markets IPO Frenzy
In recent years, we have seen a rise in initial public offerings in emerging markets as EM companies begin to recognize the advantages of going to the market to raise capital in order to expand and grow. Investors should proceed with caution, however, before chasing IPOs and short-term gains. Not all listings are created equal. There is generally a lot of promotion surrounding all new listings. It is therefore important to conduct your due diligence and evaluate the stock based on its fundamentals with a long-term investment perspective.
Focus on China: the Renminbi, Commodities and Real Estate
The Remimbi's rise is likely to be gentle and controlled. This move does not dramatically change our overall outlook on Chinese stocks, which we think should perform well in the medium term. While the real estate market may have taken on bubble-like characteristics in some specific areas, the government has been quick to react, to control and prevent bubbles, such as introducing measures to restrict bank lending on second and third home purchases. But overall, I don?t think the Chinese real estate market is in dangerous territory in terms of a bubble.
World Cup Fever in Africa
The outlook for Africa is positive. It has stirred the interest of countries like China, India and other fast-growing emerging markets, which require increasing resources for their growing economies, as well as countries like Russia and Brazil, who look to expand their enterprises into global operations. South Africa, acting as a representative for the continent through the World Cup, has shown that it can host an international event to international standards, and this bodes well for the region's future investment prospects.
Insights on Hungary
The Hungarian market was one of the top performers in Eastern Europe in 2009 with the MSCI Hungary Index returning 78 percent in US dollar terms. The Hungarian market significantly outperformed its regional peers - Poland and the Czech Republic. In the first five months of 2010, however, the market was down 12 percent in U.S. dollar terms, mainly due to a 23 percent decline in May alone on concerns that Hungary could face similar financial problems as Greece.
Addressing Investor Concerns after Heightened Volatility
Mark Mobius shares responses to investor questions on emerging markets. Emerging markets continue to be fundamentally strong, with high growth levels, a lower debt-to-GDP ratio compared to developed markets, higher foreign reserves and declining risk. Credit default swaps in many emerging market countries now trade at lower spreads than those of some European countries. On average, however, investors still have a weighting of just 3-8 percent toward emerging markets in their portfolios, while emerging markets now represent about 30 percent of the global market capitalization.
Spotlight on Southeast Asia
The GDP of Southeast Asia is about the same size as India, and within two decades, the region is expected to have a larger and younger population than Europe. It is also a major exporter of soft commodities like palm oil, rice, tapioca, coconut oil, and rubber. Vietnam is one of the key frontier markets in Southeast Asia, and valuations there are among the cheapest in the world. Indonesia's extensive resources and large population put it in a favorable position to attract investments and establish a strong domestic economy.
Finding a Niche in South Korea
Mark Mobius reflects on a recent trip to South Korea. Allegations that North Korea torpedoed and sank one of South Korea?s naval ships have elevated political tensions on the Korean Peninsula, and caused jitters in regional markets. North Korea has been in a continuous crisis, and tensions have been high since the end of the Korean War. Despite all the geopolitical concerns, however, South Korea has continued to grow its economy. South Korean manufacturers are capitalizing on their strengths to specialize in niche markets.
Comments on Thailand
Local and international investors have become accustomed to political turmoil in Thailand, and therefore have not rushed to sell at times like these. Although the recent disturbances have impacted central Bangkok, most of the rest of the country has not been affected, and it is business as usual. In fact, a few weeks ago the Bank of Thailand raised its forecast range for GDP growth this year to between 4.3 percent and 5.8 percent from the original 3.3 percent to 5.3 percent due to strengthening global demand for the country?s exports.
Reader' Questions Answered
Mark Mobius responds to reader questions on emerging markets. Mobius notes that global markets tend to react to headlines in the short-term. At the end of the day, however, each country and each company has its own set of dynamics and fundamentals. Research is about identifying the differences among them. Key differentiating factors are often the basis for success in the long run. He also comments on the Greek debt crisis, political stability in Poland, reforms in Colombia and the recent death of Nigeria's president.
Keeping an Eye on Currencies
Even though it is not clear if, when, and how China will make an upward revision in the value of its currency, one trend is clear: moves involving the renminbi by Chinese authorities will be closely watched around the world as China steps up to play a bigger role in world trade.
A Green Brazil
Brazil?s export and domestic markets are booming, and economic growth could be as high as 5.5% this year. Brazilians have become more sensitive to environmental issues, particularly since the nation?s extensive natural resources in iron ore, oil, steel, coffee, oil, soybeans, sugar and beef have historically been a source of both export and domestic consumption on a major scale.
Franklin Templeton sees tremendous opportunities for growth and investments in Romania, and will soon expand operations there. Romania and other Eastern European countries are transforming their economies from state-dominated socialist economic models to systems driven by market forces and private enterprise. Romania joined the European Union in 2007 and is undergoing substantial reforms that should strengthen capital markets in the country. Like other countries in Eastern Europe, however, Romania was hit hard by the recent financial crisis and needed a rescue package.
Update on Thailand
While the current political crisis in Thailand poses big headline risks to stocks over the short term, it is not new or unexpected for the country. Since absolute monarchy was abolished in Thailand in 1932, there have been about 20 successful and failed coups, numerous unrests, and several changes in the constitution. The series of political issues from the Asian crisis in 1997 to recent fears of the Thai King?s waning health late last year, however, have not impacted the long-term growth outlook for Thailand.
Knowing Your Shareholder Rights
This week, I talk about an issue that I think is important for investors, especially for long-term investors. It is not enough just to identify the next ?big opportunity?, but, having identified it and invested in it, you need persistence and determination to ensure that your investment stays on the right track.
Bear Stearns: The Bear That Started It all
It is now two years since the Bear Stearns bailout, which set the stage for the global financial crisis triggered by the collapse of Lehman Brothers, another established name in the business. Some of the key issues that led to the global financial crisis, however, remain unresolved, and could give rise to future problems. While perhaps not popular, it is necessary for governments to insist upon the separation of investment banking and regular banking, and to ensure complete transparency and liquidity of all derivatives.
Jordan: Optimism in the Heart of the Middle East
Mark Mobius recounts a recent trip to Jordan in search of investments. Jordan is a modern democratic constitutional monarchy with the king as head of state. It has a highly educated population of about 6.1 million and a growing middle class. Government policies focus on economic reform and growth. The country's 20 percent of GDP annual spending on education makes it one of the highest education spenders in the region. Jordan's health care system plays a key role in the national economy, and professional women are able to attain high status.
Personal Qualities that are the Building Blocks for Good Investing
Finance industry professionals need four things to succeed in the investment world: Motivation, humility, hard work and discipline. If investors can develop these personal qualities and maintain a healthy sense of optimism, they can succeed in emerging markets.
Insights from CM Analyst Conference Part II
Tom Wu of Templeton Asset Management says the emerging markets of Turkey and Hungary may offer opportunities for rapid growth. Turkey has built its foreign exchange reserves to $70 billion, while the MCSI Hungary Index posted 78 percent returns in 2009. Wu notes, however, that these opportunities for growth come with higher risks.
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