Before chatting about emerging markets, in this morning’s market commentary we are aware that there were two sentences repeated in the 2nd paragraph. I hope that this doesn’t spoil your enjoyment. If you would like to read a clean version go to the web site (www.DWCifa.com), click on “News” in the left hand menu, then “Our news” in the right hand menu – you will see all of the monthly commentaries.
I was fortunate to have the opportunity to meet with Dr Mark Mobius last week; fortunate because he is one of the most (if not the most) respected fund managers in the world. These are some of his thoughts, and one or two of ours.
Mark is the manager of the oldest emerging market fund (Templeton Emerging Markets) since 1989, and was once called “the Indiana Jones” of the investment world, as he seeks out investment opportunities in the farthest-flung corners of the globe. He has witnessed at first hand some remarkable changes (e.g. the fall of the Berlin Wall, the emergence of new economic powerhouses in China and India), and successfully and consistently exploited these for the benefit of his investors.
He is based in Singapore (he can hardly call it home as he spends so little time there), and was in London with his expanding team (which now manages $30bn), in particular those covering emerging Europe, India, and China.
He feels a little uncomfortable right now, and is in something of a dilemma. He is happiest when markets are down, much like ourselves, as opportunities abound, but many emerging market stocks are at an all time high, and normally that would have Mark running for cash. Yet he believes that many of these stocks are still cheap when the growth potential is taken into account, and are rated somewhat more cheaply than developed economies that have perhaps only one half the growth potential. So if there is going to be more widespread stockmarket turbulence as the world adjusts to the likelihood of an economic slowdown in the US, he is happy to sit through this period fully invested, confident at a profitable outcome.
Of all the emerging markets their favourite is Turkey, which they believe is under-valued and mis-understood, and they will be strong buyers on any weakness ahead of elections next year. The opening of a Harvey Nichols in Istanbul was testimony to the pulling power of Turkish consumers. This is not a recommendation to go and buy a Turkey-only fund! Usually we will not recommend single country funds. In the first quarter of this year we encountered many clients wishing to buy India-only funds. We convinced most clients that it would make more sense to buy a more broadly-spread emerging market fund, particularly as we were aware that most emerging market fund managers were sharply reducing their exposure to a very toppy looking Indian stockmarket. Having said that, their Indian specialist remains very optimistic about the long term potential.
He likes Russia, which is awash with cash. Their stockmarket is dominated by oil and gas stocks, so they find other routes to benefit from a buoyant Russian economy, such as the Swedish cosmetics company Oriflame, which sells heavily into Russia.
In any emerging market there is always a fear of political turmoil or Governments suddenly swinging sharply to the left of the political spectrum, such as Venezuela recently. With China and Russia having relatively recently emerged from their Communist past, sudden backward steps can be a pre-occupation. Yet Mark believes that of all the emerging markets China is politically the most robust, with little choice but to continue to carve out their version of capitalism and democracy.
Oil consumption per head is one of my favourite indicators of an emerging market, and may highlight those that have lots of upside potential. Oil consumption per head per annum is about 15 barrels in Japan, and 17 barrels in Korea. A country with consumption of just under 3 barrels per head must have huge potential – that country is China.
Mark noted the turnaround in South Africa with a fascinating anecdote. He was visiting the President of South Africa (Thabo Mbeki) and on reaching his official residence, they found the guard was asleep. They drove past quietly (not wishing to disturb the guard) and let themselves in to be warmly welcomed by the President, who was quite relaxed about this chain of events. Perhaps a lesson for the more trigger happy Russians.
It is frequently said that emerging markets are high risk and very volatile, and as a long time monthly investor into this Templeton fund I can certainly confirm that there have been many “interesting times”. Yet Mark points out that emerging markets in aggregate are no more volatile than the US stockmarket. Moreover, research from HSBC this week argues strongly that it is not emerging markets that are most exposed to a US slowdown. This was not the case in the past, but they are now considerably more financially strong, and if they now hide any surprises they are likely to be positive ones.
Emerging markets remain a fascinating area in which to have some exposure, providing that you are comfortable with the higher risks and volatility. It is a superb choice for monthly investments, particularly for children and grandchildren, and could capture their imagination as time goes on, in a way that stamp collecting no longer can!
Brian Dennehy, 6th October 2006