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Mark Mobius, President of the Templeton Emerging Markets Fund, speaks about his expectations on how the global stock markets will behave and what would be a safe bet in these times of unpredictable volatility.
Gulf News: How long in your opinion will the bear market last?
Mark Mobius: I believe the bear market that started in August 2007 is now in recovery phase but will not be immediately followed by a strong bull market. This is unlike 2006 when markets came down and rebounded quickly in the space of a few weeks on the back of hedge funds with lots of leverage behind them.
So, this time around we do not have the same situation because banks are being much more cautious. We may see a sideways market in the immediate future, rather than a big bounce until the markets find their foundation.
My guess is we will see continued volatility for a while, maybe extending closer to the Beijing Olympics. Over the last 20 years, we have witnessed a variety of bull and bear periods in emerging markets. The bull markets have lasted longer and have gone up more than the bear markets have gone down.
Is it a good time to invest in equities? If yes, then why; if not, then when will the time come?
Timing the markets is a very unforgiving exercise and I wouldn't recommend it to anyone. We at Templeton simply continue to try to buy stocks that are cheap at a given moment. The mere fact that we only have no more than five per cent in cash in most of our funds indicates that we are optimistic and that we are prepared for a market bounce.
Emerging markets valuations have also come up quite significantly in the past few years, but so have earnings, so emerging market equities continue to offer good price-earnings characteristics. Yes, too, a slowdown in global growth is now being predicted this year, including growth in emerging markets. But a slowdown or crisis in one country can be remedied by an upturn in another.
Emerging markets this year are expected to experience an average gross domestic product (GDP) growth of seven per cent, while developed markets are expected to grow at an average of a little more than two per cent.
It is very easy for investors to get caught up in emotions or simply follow the herd. I would suggest that investors take a long-term view to investing, carefully evaluate their options and of course, diversify their holdings. History has shown us that the best time to buy is when everyone is despondent and selling. This has enabled at Templeton to pick up stocks at more attractive prices than before. The markets may to be volatile at times, but the underlying fundamentals of emerging markets remain in tact.
In which countries, in your opinion, do equities have the biggest growth potential and why (are people talking a lot about Brazil recently)?
Some of the fastest growing nations in the world today are the BRIC (Brazil, Russia, India and China) countries. The Chinese and Indian consumers are the world's new consumers and they along with consumers in Brazil, Russia, Turkey, the UAE, Egypt, Mexico, Poland and many other emerging markets are becoming an important force in world consumption. Despite the current political volatility, we have liked Turkish investments for some time, because we are able to find there plenty of well-run companies operating in a growing domestic market. Returns on capital are high, valuations are low, and the country's economy is moving closer to the European Union.
In emerging markets in general, we will continue to focus on energy, telecom, transportation and banks.
Which countries should be avoided at present as far as investment in equities is concerned?
We continue to find value stocks in all markets since most markets will have at least some undervalued stocks. Given that we have a bottom-up strategy focused on finding the most attractively valued equities on a risk-return basis, there are few countries we consciously "avoid".
However, we have minimal exposures to markets such as the Philippines and Chile due to size and liquidity issues. In the case of the Philippines, 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. We have just returned from a trip to the Philippines and found a much improved investment environment. However much still needs to be done. We exited Venezuela as soon as Chavez came to power since we saw the potential risks.
Do you think the present bull market in natural resources has a chance to last and if yes, which natural resources will increase the fastest? Do funds managed by you take advantage of the natural resources bull market and if yes, then which specifically and how?
Commodities are one of the four 'c's that are our main investment themes. The other three are: Consumer, Convergence and Corporate Governance: Sectors that are geared towards direct consumption will continue to benefit from the higher disposable income per capita in emerging markets. With commodity prices at relatively high levels, there will be many opportunities for good profits for companies supplying them.
Convergence in regions such as Asia between China will continue to provide good opportunities for companies. Finally, Corporate Governance is very important in investing. We want to invest in companies that treat investors fairly.
Coming back to commodities, our funds have lots of exposure to commodities-linked companies that are benefiting from high prices and high global demand, including Vale do Rio Doce in Brazil and Gazprom in Russia. We also have exposure to the rapid rise in Chinese oil demand, through Petrochina.
In general, Russia is a big commodity play. The big run-up in the market prices of some of our Russian oil and gas holdings has automatically resulted in Russia accounting for a larger share of some of our portfolios than before. We are conscious that the Russian stock index is exposed to a correction in energy prices, but the Russian commodity-related stocks in our portfolio will continue to make good profits and record substantial margins, even allowing for price corrections.
In general, we remain optimistic about the energy sector because of geopolitical and short-term constraint reasons. While we do not project the average crude oil prices to maintain their recent lofty levels, demand growth still looks strong and makes the tight supply and demand situation even tighter.
Some fund managers think that investment in gold should always be part of the investment portfolio. Do you agree with this opinion?
Gold per se? I'm not sure. We in the Templeton Emerging Markets group do not run any gold funds. However, their rich gold and precious metal deposits are one reason some African countries are growing so fast. Of course some natural resource companies are also doing well. In Latin America, much of Peru's growth has been coming from gold as well as copper. In essence, one can achieve gold exposure through a well-diversified emerging markets portfolio.
How much profit (average per year) do you think investors, who will enter the market now, can make within next five years?
I wouldn't like to make predictions. Emerging markets around the world are doing very well, with their economies and stock markets booming. However, the years of "amazing performances" for emerging markets might be over. But - while no indicator of future trends - historic long-term performance measures suggest one might expect average returns of 15-20 per cent per annum (in US dollars) from an emerging market investment. I would like to stress that this is a long-term average, and there are years when markets go down and investors can suffer substantial losses. This means it is really important for investors to ensure they are diversified across many markets. This will allow them to better manage their risk levels.
Also, value is the key. The best protection against volatility is to select companies that are selling at a discount to what they are really worth and companies with good managements capable of realising the firm's intrinsic value.
At the same time, investors must remind themselves that economies and stock markets are constantly changing. It has been proved time and time again that most of the time forecasts of these evolving phenomena turn out not to be accurate. We are currently in an exciting period, but one with high volatility.
What do you consider to be your best investment decision and which one was the biggest failure?
There are many investment successes and failures in our work. The best results have come from long-term holdings that we have kept for a number of years through ups and downs in the market.
Do you think that individual investors can achieve better performance/results than investment funds managed by you?
I would not like to be presumptuous, but Templeton does provide an array of resources and decades of experience that are not available to loan individuals.
Templeton has over 50 years of experience in proven global investment, a cautious and prudent approach and an outstanding record of consistent performance. Templeton launched its first dedicated emerging markets fund in 1987. Moreover, the Templeton emerging markets equity team is one of the largest and most successful such teams in the industry. It currently comprises more than 50 investment professionals, including 35 portfolio managers and analysts each averaging more than 10 years with the group and working out of 14 offices around the world.
Our funds enable investors to benefit from the fund manager's experience as well as buy a basket of stocks at cheaper prices than if he/she were to buy individual stocks. This also leads to greater diversification and subsequently lower risk for the investor.
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