Posts Tagged ‘Mark Mobius’

China Fueling Auto Sales

Thursday, July 12th, 2012

 

by Mark Mobius, Franklin Templeton Investments

The picture postcard image many Western travelers may have of China’s city streets is one besieged with bicycles and empty of cars, but China is no longer pedaling its way into the future—it’s firmly in the driver’s seat as autos rapidly replace human-powered transit. Motor vehicle sales have been booming in China, a reflection of the growing middle class. In 2009, car sales (by volume) in China exceeded those in the United States, and in 2011, China led world auto production at 18.4 million units.1 Consumer demand continues to power sales of both domestic and foreign brands in China. In May 2012, vehicle sales in China surpassed 1.6 million units, rising 16% on a year-over-year basis, compared with just over 1.3 million units sold in the U.S.2 While overall growth may have been slowing in China this year, solid sales of durables like cars provide evidence its consumers remain a powerful global economic force.

Historical Perspective

The roots of China’s auto industry predate the 1950s, but market reforms in China in the late 1970s, 80s and 90s associated with Communist Party Chairman Deng Xiaoping unleashed a strong pent-up demand for car ownership.3 Passenger car production was rather anemic during those decades, but China’s entry into the World Trade Organization in 2001, along with domestic reform efforts, helped pave the way for acceleration in the Chinese car market during the past decade.

When I first visited China 20 years ago, I could cycle all over the cities along with millions of others. As consumers started to move behind the wheel, bicycle use dropped. Some large cities (like Beijing) became so choked with car congestion that the government had to impose permit quotas for new registrations. Even with the supply of new autos limited on city streets, I see no signs of slowing demand for cars in both the cities and the rural areas. This growth could have implications for the long-term price of oil and other fuels needed to power all these vehicles, too.

At present, foreign companies still dominate the Chinese auto market. European and U.S. brands lead, followed closely by Japanese and Korean automakers. The attractiveness of the Chinese market and desire to save on foreign exchange costs led to the establishment of domestic car plants in China. Limits on foreign ownership had prevented overseas manufacturers from setting up wholly-owned plants, so they proceeded via joint ventures with state-owned firms or Chinese entrepreneurs. Overseas car firms often formed ventures with several different local businesses and the joint ventures—both then and now—produce a combination of global brands under license as well as domestic brands.

In the luxury market, major European and U.S. companies continue to dominate for the time being, and are investing heavily in state-of-the-art production facilities in China. Ultra-luxury cars are still imported, and China is becoming an increasingly important market for such vehicles, as evidenced by the western luxury brands that have revealed dramatic sales increases in China over the past few years. One European automaker has reported that approximately 25% of its worldwide profits now come from China, and in recent months, has sold more cars in China than in the U.S.

Auto Production in China: Quality, Quality…and Quality!

On a recent visit to a European automaker’s manufacturing facility in China, there were three things that impressed me when I observed production there. First: the cleanliness. Second: the emphasis on quality control. It seems that as much time and effort was spent on quality-control as on actual production. Third: the ease at which the workers on the assembly line did their tasks. Careful production planning was evident; each production step was designed to make the worker’s job easier. I noticed a lot of robotic tools and easily accessible parts. The degree of automation was impressive and the emphasis was on quality, quality and more quality!

Local Chinese brands, however, are gaining market share, and I observed a dozen or so with interest. The largest producer of sports utility vehicles in China, for example, is a local brand which also exports to more than 60 countries. I was able to visit one of the company’s new plants in China, where it is expanding production at a rapid pace.

Electric and hybrid vehicle production is ramping up in China, and one of the most interesting domestic auto companies I toured was engaged in the production of electric vehicles. When visiting the factory, I was given the opportunity to drive one of their cars. I was shocked by the acceleration; the car leapt at a soft press on the pedal. And, being electric, there was no motor noise, which took some getting used to.

There is evidence that the Chinese government would like the share of local brands in the market to rise. In 2012, the government published a list of approved vehicles available for purchase by government organizations that contained only local producers.4 And, according to state media reports, the Chinese government is considering a revival of subsidies to buyers of smaller vehicles in rural areas, which could help further fuel domestic sales.

In recent days, we’ve even seen some domestic Chinese automakers acquiring foreign brands, and I expect that trend could continue as weakness in the Eurozone could unearth some bargains for Asian automakers on the hunt for acquisitions. The expansion of Chinese car brands into foreign markets hasn’t made much of a splash yet, but over time I see potential for China to emerge as a key player in the smaller, more affordable car market.

Relative to the size of its population, auto ownership in China is still in its infancy and has much room to grow. With China’s weight in global car markets likely to increase in the decades to come, it’s certainly an exciting time for the auto industry in China.

1. Source: Organisation Internationale des Constructeurs d’Automobiles, March 2012.

2.Sources: Bloomberg; National Automobile Dealers Association, May 2012; Ward’s Auto.

3. Source: Federal Reserve Bank of Australia, “The Emergence of the Chinese Automobile Sector,” March 2011.

4. Source: China Car Times, February 27, 2012, Ministry of Information and Technology

Copyright © Franklin Templeton Investments

Tags: , , , , , , , , , , , , , , , , , , ,
Posted in Markets | Comments Off

Addressing Volatility (Mobius)

Tuesday, October 18th, 2011

by Mark Mobius, Vice Chairman, Franklin Templeton Investments

With ongoing global uncertainty, I believe there are still a lot of questions surrounding the impact of market volatility in both developed and emerging markets. I recently recorded an interview discussing my views on some of these questions and want to share it with you through a video blog. I hope you like it.

Source: Mark Mobius, Franklin Templeton Investments

Tags: , , , , ,
Posted in Markets | Comments Off

Commodities and Conservation in the Caspian

Tuesday, October 4th, 2011

by Mark Mobius, Franklin Templeton Investments

Hello readers, thank you for your patience while I was away from this space for a few weeks. We continue to see quite a lot of market volatility, but of course we consider these to be times of opportunity in our ongoing hunt for attractive investments, and we have been pounding the pavement to look for bargains. Here’s a note from a recent visit.

At an oil rig on the Caspian Sea
At an oil rig on the Caspian Sea

 

What country is the world’s largest producer of petroleum? No, it’s not Saudi Arabia but Russia.[1] Oil and gas are important to Russia’s economy, as are a whole host of natural resources such as nickel, palladium, diamonds, etc. Because of what have been higher commodity prices, Russia’s economy is growing at a fast pace (it is projected by IMF to grow 4.3% this year),[2] interest rates have come down from their peak in 2008, unemployment is lower, foreign reserves have risen to over US$500 billion as at July 2011, and Russian equity markets have generally done well since 2008, even considering recent declines. That is why we have been to date interested in Russian oil companies. For this reason, I launched a trip to the Caspian Sea to see first-hand how oil drilling and production operations worked on an offshore oil rig.

The plan was to fly to Astrakhan, the Caspian Seaport, and then proceed to the rig. Astrakhan, with a population of half a million, is a key city of southern Russia and has a fascinating, tumultuous history. Tamurlane burnt it to the ground in 1395, then Ivan the Terrible conquered it in 1556 and built a fortress that still stands in all its white glory, with incredibly thick walls and a beautiful Orthodox cathedral. When we visited the fortress, we found that the cathedral was full of worshippers young and old. The fortress has withstood many invasions, including in the 1600’s by the Ottomans, and even the famed Janissaries were not able to penetrate the thick walls. Finally, when the Ottoman sultan renounced his claim to the city, the whole region was opened to Volga River trade, and the city became a gateway to the Orient, used by merchants from Armenia, Persia, India and even the Muscovy Company of English merchants. In the city, we saw some of the old “caravansary” buildings, ancient rest-stops for travelers, still standing. During his reign, Peter the Great had a shipyard constructed here and made it his base for war against Persia (now Iran), right across the Caspian.

Oil wells were dug in the Caspian region as far back as the tenth century, when English traders described the oil coming out of the ground in the area around Baku, in Azerbaijan. The first offshore wells were made in 1873 in Baku, and by 1900, Bakuhad more than 3,000 oil wells, leading to its being called the “black gold capital”.

In addition to oil, the Caspian Sea is also famous for its beluga caviar since the sea is supposed to be rich in sturgeon, the source of this world-renowned caviar. Astrakhanwas especially well situated for this purpose, thanks to its location at the Volga River delta on the Caspian Sea. However, after excessive overfishing, sturgeon is now a protected species in Russia, and there is a strict ban on extracting its caviar. I decided to do more research about Russia’s efforts to repopulate the Caspian Sea’s overfished sturgeon. We drove out of the city to see a research institute and observed its successful program to spawn sturgeon artificially in an experimental spawning and breeding facility.

When we arrived, we were ushered into a complex of buildings with hundreds of tanks where fish eggs were being cultivated into fish fry and then into full-grown beluga sturgeon as well as a host of related species. Each year the institute releases over one million fish into the Caspian Seain different sizes, from as small as 10 grams to as big as 250 grams. It is a never-ending effort, since illegal fishing still thrives in the Caspian Sea, and cooperation between the countries bordering the sea—Russia, Kazakhstan, Iran, Turkmenistan and Azerbaijan—is difficult. Scientists at the institute told me that a few years ago, a Chinese delegation visited the research center, and today China is the world’s largest cultivator of sturgeon!

After this short but interesting detour, we turned our attention back to our main focus: the oil rig. We made our way to a modern ice-resistant stationary platform equipped with a drilling complex that had a capacity to drill wells 7,400 meters deep. Attached to the main platform, where our helicopter landed, were living quarters for over 100 people. On our tour, the engineers explained that oil was transported from the production platform via a subsea pipeline to a floating storage unit located outside the Caspian ice zone, where shuttle tankers pick up the oil. The spotless and highly efficient rig was bristling with high-tech equipment and all kinds of safety features. At the rig platform itself, we were told that the rig was not only drilling downward but also drilling horizontally, with pipe lengths exceeding five kilometers, so that it was possible to simultaneously drill in a number of productive formations. The control room included a host of monitors using satellite feeds to give the engineers the precise and real-time location of all operations, in addition to undersea cameras to observe the various wells.

I found it interesting and insightful to see first hand how the oil rig functioned, and this visit gave us more clarity on the health of the overall business. In my opinion, visiting operations and production centers on-site is one of the best ways to see how companies in Russia are doing.

[1]. Source:U.S. Energy Information Administration, as of 2009 (latest available data).

[2]. Source: World Economic Outlook, September 2011. © By International Monetary Fund. All Rights Reserved.

Tags: , , , , , , , , , , , , , , , , , , , , , , ,
Posted in Commodities, Gold, India, Markets, Outlook | Comments Off

Mark Mobius: Extensive Interview, Outlook, Perspective on Emerging Markets (Bloomberg)

Friday, September 9th, 2011

MARK MOBIUS, EXECUTIVE CHAIRMAN, TEMPLETON ASSET MANAGEMENT, IS INTERVIEWED AT BLOOMBERG TV

AUGUST 29, 2011

SPEAKERS: Mark Mobius, Executive Chairman, Templeton Asset Management

MARK MOBIUS, EXECUTIVE CHAIRMAN, TEMPLETON ASSET MANAGEMENT: Isn’t it wonderful? The markets are down. That’s the time I’m very, very happy. Unfortunately a lot of our clients are not too happy.

And I remember during the last downturn during the Asian crisis I was in Edinburgh, Scotland. And you know the Scottish don’t like to lose money. And this gentleman called in. By the way my name is pronounced Mobius and this gentleman called in. Apparently he was a holder of our emerging markets fund. He said, “Now, about this emerging markets fund, I’d like to talk to Dr. Dubious.” So we have to be very [hard].

What I’d like to do today in twenty minutes because we’ll leave enough time for questions, which is the most interesting part of these events, I want to give you a quick outlook on where we are within the canvas . And of course the first thing is performance. How is the emerging markets’ performance?

And if we look at the ten-year performance we see that emerging markets have outperformed the world and the US market by a very, very wide margin. If you look at the five-year performance, again, emerging markets have outperformed by a very wide margin. If we look at the 2010 performance, again, emerging markets have outperformed by a wide margin, but if you look at the recent since January, actually emerging markets have underperformed.

And I know a lot of people thought they had [sales], not it’s finished for emerging markets. No, it’s not over. Why? If you look at history the last ten years emerging markets outperformed full years of these nine out of ten. This year I don’t know what’s going to happen by the end of the year, but it’s not surprising that it might outperforming, but I think it will probably surge up again and outperform.

So what I’d like to do is give you the reasons why we feel that the markets are behaving in the way they are. In order to understand the markets you’ve got to understand supply and demand. It’s a marketplace.

If there’s too much supply the market’s not going to do very well. If there’s too much demand the market is going to be doing very well because the prices will move up, but what happens is when the markets go up you see a lot of new supply coming in.

And if you look at the supply numbers for emerging markets since 2000 you see that back then emerging market IPOs and follow-on issues represent about ten percent of the global IPO and follow-on issues area. Now in 2010 it went up to 50 percent of the total. So we’ve seen a lot of new issues coming in.

This gives the numbers. Of course that blue line is the index, and of course when the index goes up in ’07 we had a very bullish market. The number of IPOs went up to roughly $370 million, $380 million – billion dollars. And last year we saw over $460 billion in IPOs, so obviously lots of supply and that tends to have a depressing effect on the market, which by the way I think is great because otherwise we would have had a bubble.

If we look at where the IPOs are coming from you’ll see that China has grown dramatically compared to the US. Back in ’08 China represented maybe about one fifth of the US IPO market. Now in 2010 they surpassed the US.

If we look at emerging markets, emerging markets after years of being under the US now is far, far greater than the US, and of course the US the largest market in the world. So we’re seeing a lot of supply coming in from emerging markets.

Okay. How about demand? Where’s demand coming from? If we look at the total market capitalization of emerging markets, and by the way market capitalization is calculated by multiplying the number of shares outstanding in all these markets by the price. Of course when prices go up the market capitalization goes up. And if the number of shares goes up market capitalization goes up as well.

If both go up then we really have a big increase, but you can see that since 1998 when the percent of emerging markets was eight, anywhere between three to eight percent, we’re now up to 34 percent. So when people ask me what percent should I have in my portfolio in emerging markets I tell them that would be 34 percent because that’s the market. That’s the percent that it is in the global market, but most people have between three to eight percent in emerging markets, that yellow bar. Unfortunately they don’t list them at the bottom. They don’t buy at the bottom.

My sister-in-law when there was big boom before the Asian crisis in emerging markets went into our emerging markets fund. The next year when the market tanked I had to visit my brother in Buffalo, New York. And I remember knocking on the door. I heard her voice behind the door. “Who’s there?” I said, “I said it’s Mark.” “I’m not opening the door and give me my money back.” I said, “If you’ll open the door I’ll tell how to get your money back.” She opened it up and left the chain on the door. She said, “How?” I said, “Buy more.” She slammed the door in my face.

This is the situation where you have in these markets very, very few people have 34 percent in their portfolio in emerging market stocks. And I’ll tell you there are a lot of reasons why it should be more. And it’s happening because you can see the net inward close into emerging market funds like our own growing very rapidly, as you can see from this chart.

What are the fundamentals? Why do we think that people should be in these markets? Well, first of all it’s all about growth. Emerging markets this year will be growing three times faster than the developed countries, US, Japan, Western Europe, three times faster, even the most pessimistic forecasts.

By the way, I decided to downgrade our China forecast and then I looked at the consensus, the recent consensus is up. It’s not down. If you look at China and India this year the consensus is that China will grow by nine percent. India will grow by almost eight percent compared to 1.7 for the US and a minus number for Japan.

So the growth is there. There’s no question about it. The next years, and by the way, another thing I think we have to get straightened out is some people who have been saying because some people I cannot fathom. There’s no relationship between the stock market and economic growth. I don’t know where they get this, but I think I’ve figured it out because they’ve done correlation analysis.

They say, okay, let me take January to December and correlate the stock market with the economic growth. And it’s a negative number. They don’t correlate. Why? Because the stock market is a leading indicator. It moves up before the economy moves up, so of course there’s no correlation. It doesn’t mean there’s no causation. The causation is definitely there. There’s a strong relationship between economic growth and the health of the stock market because companies depend on economic growth.

Pages: 1 2 3 4

Tags: , , , , , , , , , , , , , , , , , , , , ,
Posted in Brazil, Commodities, Gold, India, Markets, Oil and Gas, Outlook | Comments Off

Faber, Chanos, Gross, Rogers, Mobius on U.S. Downgrade

Monday, August 8th, 2011

Aug. 8 (Bloomberg) — Bill Gross, co-chief investment officer of Pacific Investment Management Co., Marc Faber, publisher of the Gloom, Boom & Doom report, investor Jim Rogers, chairman of Rogers Holdings, Jim Chanos, president and founder of Kynikos Associates, and John Chambers, chairman of Standard & Poor’s sovereign debt committee, talk about S&P’s decision to cut the U.S.’s long-term debt rating and its implications for financial markets.

This report also includes comments from Glenn Hubbard, the Columbia Business School dean who led the Council of Economic Advisers under President George W. Bush, Peter Fisher, head of fixed income at BlackRock Inc. and Mark Mobius, executive chairman of Templeton Asset Management’s emerging markets group. (Source: Bloomberg)

Tags: , , , , , , , , , , , , , , , , , , ,
Posted in Markets | Comments Off

Urbanization: Building a New World (Mobius)

Thursday, July 21st, 2011

by Mark Mobius, Vice Chairman, Franklin Templeton Investments

In this two-part series on urbanization, I will share my thoughts on how urbanization is driving infrastructure development and spending, which in turn can lay the foundation for potentially sustainable, long-term growth in emerging markets, both in terms of the economy and per capita income. Investment in infrastructure has been gathering momentum all over emerging markets, from plans to construct a high-speed train in Brazil connecting Rio De Janeiro to São Paulo, to bridges and tunnels springing up in China and India. Brazil, an export-driven economy with a large consumer market, also needs to improve its infrastructure ahead of hosting the 2014 FIFA World Cup and 2016 Olympic Games. Better infrastructure can provide the basis for potentially sustainable long-term economic growth, which in turn paves the way for interesting investment opportunities.

Over the next few decades, I believe we are likely to see an increase in several types of infrastructure investments due to rapid urbanization, which drives the increasing global demand for resources, mainly from emerging markets. I expect there will likely be many opportunities, particularly in the energy and materials sectors. Rapid urbanization in emerging markets, driven by rural populations migrating to cities in search of work and better opportunities, has put pressure on resources and prompted governments to pump money into a range of urban infrastructure-related sectors such as housing, transportation, sanitation, water, electricity and telecommunications.

I have a particularly positive outlook on infrastructure growth in Africa, especially in South Africa, Nigeria, Egypt and Kenya. On average, Africa’s urban centers are collectively growing at a faster rate than anywhere else in the world. Today, 40 percent of its one billion people do not have access to water and sanitation — a clear indication that the continent’s rapid urbanization has outpaced its capacity to provide these essential services.1 However, larger emerging markets have recently been investing in Africa. Most notably, China is engaged in a number of major infrastructure projects most often involving government-to-government agreements with African nations.

China already has substantial experience with rapid urbanization—some Chinese cities are among the fastest-growing in the world, largely thanks to the government’s decision to adopt a pro-urban approach to economic development. It is estimated that by 2025, roughly two-thirds of China’s population will live in cities, and by 2030, China’s urban population is projected to reach one billion.

I was recently in China for some company visits and stopped in cities such as Beijing, Changsha, Chongching and Chengdu, where I saw that growth in infrastructure and housing was continuing apace. Some are concerned about a real estate bubble; and to some extent, there has been some overbuilding of luxury and high-end housing beyond the reach of the majority of Chinese consumers. Much of the demand for these apartments and homes has been from investors who see property as a long-term investment, purchasing a number of apartments, for example, and leaving them vacant. Like many other markets and sectors, we will continue to monitor developments in the real estate sector closely. However, many parts of China still suffer from a poor state of residential housing and there is a real need for quality, affordable housing. The Chinese government has specifically recognized this need in its new five-year plan. With new programs, the government could potentially approach its goal to supply more affordable housing to a significant portion of the population.

Infrastructure projects can act as both the drivers and results of economic growth, and could be an interesting way to potentially benefit from the high economic growth in many emerging markets. Among the infrastructure-related areas that have historically proven to be interesting are companies involved in construction and construction supplies. However, many of these projects, such as those related to power and water utilities, are often dependent on government intervention and regulations, which can sometimes be problematic. In addition, the actual construction of projects could also involve environmental and social challenges. As a result, we have to be very careful and cautious in our selection of potentially interesting investment opportunities related to infrastructure and urbanization projects. Detailed research is generally crucial to evaluating the profitability potential of investment opportunities in this space, as is familiarity with local regulations, customs and cultural sensibilities.

In my next post, I will expand on how the increase in infrastructure spending has been one of the drivers of increased commodity demand, which, as it outpaces supply, is likely to push up prices for a range of natural resources and commodities.

Copyright © Franklin Templeton Investments

Tags: , , , , , , , , , , , , , , , , , , , , , , ,
Posted in Brazil, Commodities, India, Infrastructure, Markets | Comments Off

China: Solution for European Debt? (Mobius)

Tuesday, June 28th, 2011

“It’s not unrealistic (for China to backstop the European debt crisis); in fact it’s very realistic, particularly at this time when China wants to diversify its foreign exchange holders… They have $3-trillion, and trying to put that away isn’t easy, and the euro is an obvious candidate,” Mark Mobius, executive chairman of Templeteon Emerging Markets Group told CNBC.

Source: CNBC

Tags: , , , , , , , ,
Posted in ETFs, Markets | Comments Off

Mobius Says “Financial Crisis Around the Corner”

Monday, May 30th, 2011

by Trader Mark, Fund My Mutual Fund

Much like FPA’s Robert Rodriquez (highlighted yesterday), another of the world’s brightest financial minds, Templeton’s Mark Mobius says we wasted a crisis, and nothing really has been fixed – the same thoughts this humble writer offered in 2008 and 2009 as bailout after bailout was granted, with no fundamental change to the system.  While Mobius says it is “around the corner” I have great faith than the world’s central banks will be able to print enough money to keep the balls juggling for quite a while more.  Much like Rodriquez I have no idea when the proverbial manure hits the fan, but the seeds of said crisis are sown nicely.  We can however be assured that a Fed who under Greenspan and Bernanke knows how to do nothing but create bubbles while kicking cans… and then crater the system, while being the bank’s drug dealer in chief, will have another mess (of their own making) to clean up in due time.  And just like this last time around when the house comes burning down, The Bernank (or maybe easy money Yellen by that moment) will race to the scene of their crime, pour water on the burning system and tell everyone to thank them for rescuing us!   And no one will ask why we keep having the same problems, and who is the nexus of them all.

Until then we dance!

Via Bloomberg:

  • Mark Mobius, executive chairman of Templeton Asset Management’s emerging markets group, said another financial crisis is inevitable because the causes of the previous one haven’t been resolved.  “There is definitely going to be another financial crisis around the corner because we haven’t solved any of the things that caused the previous crisis,” Mobius said at the Foreign Correspondents’ Club of Japan in Tokyo today in response to a question about price swings. “Are the derivatives regulated? No. Are you still getting growth in derivatives? Yes.”
  • The total value of derivatives in the world exceeds total global gross domestic product by a factor of 10, said Mobius, who oversees more than $50 billion. With that volume of bets in different directions, volatility and equity market crises will occur, he said.  The global financial crisis three years ago was caused in part by the proliferation of derivative products tied to U.S. home loans that ceased performing, triggering hundreds of billions of dollars in writedowns.
  • “With every crisis comes great opportunity,” said Mobius. When markets are crashing, “that’s when we’re going to be able to invest and do a good job,” he said.
  • The freezing of global credit markets caused governments from Washington to Beijing to London to pump more than $3 trillion into the financial system to shore up the global economy.
  • The largest U.S. banks have grown larger since the financial crisis, and the number of “too-big-to-fail” banks will increase by 40 percent over the next 15 years, according to data compiled by Bloomberg.  “Are the banks bigger than they were before? They’re bigger,” Mobius said. “Too big to fail.”

Copyright © Trader Mark, Fund My Mutual Fund

Tags: , , , , , , , , , , , , , , , , , , ,
Posted in Markets | Comments Off

Mark Mobius on Frontier Markets

Monday, May 9th, 2011

A recent Q&A with Mark Mobius, Templeton Asset Management’s emerging markets guru, follows below, courtesy of the company’s monthly newsletter.

What are frontier markets?

Frontier markets are commonly used to describe a subset of emerging markets which have lower market capitalization and liquidity than the more developed emerging markets. More importantly they are markets that have not yet been “discovered” by the majority of investors. They are markets where there is limited research available to investors.

Frontier markets may generally be smaller and less developed than emerging markets, but they continue to experience strong economic growth and maintain a low debt-to-GDP ratio. They are where many emerging markets were 20 years ago. In the future, we expect these markets – at least some of them – to become quite important and to eventually become full-fledged emerging markets.

What is your rationale for investing in them and what’s the essence of your investment strategy?

Economic growth in many frontier market countries remains high and is even faster than some emerging markets and exceeds the growth in developed markets by a wide margin. The growth is not only economic growth but also growth in capital markets. Some of these markets are moving from small and illiquid status to large and liquid.

Many frontier countries are also leading producers of oil, gas and precious metals, and they are well positioned to benefit from the high global demand for these resources. Additionally, as the economies of frontier market countries expand, they continue to increase investments in infrastructure, offering valuable opportunities in the construction, transportation, banking and finance and telecommunications industries. Rising consumption provides these economies with strong purchasing power and the ability to spend their way into growth. Moreover, frontier market countries have been, and continue to be, positively impacted by the substantial investments made by large emerging market countries such as China, India, Russia and Brazil.

The economic drivers across frontier markets are diverse. For example, Botswana, one of the world’s largest diamond exporters, is introducing call and data processing centers. On the other hand, Kazakhstan, a country rich in oil and other natural resources, is seeing significant investments in infrastructure development. These varied economic themes across frontier markets ensure a diversified portfolio.

And why should investors care about frontier markets? Aren’t emerging markets already “risky” enough?

Frontier markets are actually not more risky than emerging markets or developed markets. Although there are a lot of uncertainties because of the general lack of knowledge among investors who don’t have the resources to study those markets, the actual risks are not significantly different from other markets. Although individual markets can be volatile, combined in a diversified portfolio they could be less volatile than a portfolio of developed market stocks.

How does the disaster in Japan (and potential slower growth from Japan), as well as the turmoil in Middle East, factor in one’s analysis of frontier markets?

The Japan and Middle East situations are not having any more impact on frontier markets than any other markets around the world. Of course, in the case of some of the Middle East markets there has been some volatility. However, the wide range of frontier markets going from places like Nigeria, to Vietnam and Ukraine means that events in, say, Egypt, will not have much impact on the other markets.

 

In fact, we continue to invest in Middle East companies that we believe will survive the current turmoil and prosper over the next five years. Generally speaking the “information revolution” where people of all walks of live and in every economic status can communicate quickly and efficiently with cell phone and through the internet means that it will be more and more difficult for corrupt and dictatorial regimes to survive. This is quite beneficial for the development of capital markets and particularly stock markets so we are quite optimistic regarding the Middle East. Emerging markets growth rates and per capita income are moving up at a rapid pace. As foreign reserves in these countries reach sky-high levels, and their safety profile continues to improve, perceptions about emerging markets also continue to improve. People are beginning to realize they’re not as risky as they seem. Moreover, there’s quite a lot of value in emerging markets, because earnings growth is keeping up at a rapid pace, so we still are finding opportunities.

Do events such as the instability in the MENA region make “investing” during these volatile times more attractive? Or simply more dangerous?

If you have good research on the frontier market companies, volatility can be very good since with panic selling prices can come down temporarily to very low levels enabling the patient and knowledgeable investors buy stocks cheaply.

What are the challenges of investing in frontier markets and how do you try to circumvent them?

While frontier markets offer a potentially attractive investment opportunity, an array of challenges also exists. Examples include poor information flow, illiquid stocks and sudden government policy changes. Frontier markets are subject to additional, heightened risks due to a lack of established legal, political, business and social frameworks to support securities markets. Relying on seasoned international fund managers who have demonstrated knowledge in navigating through these relatively new and volatile markets is essential.

Our emerging markets team has over 40 investment professionals working from offices in 17 locations. In employing Templeton’s ground-up investment approach, our local analysts are able to address such issues because they not only understand the local languages and culture, but they get to know the companies and the market environment by meeting with company management teams, understanding the impact of local regulations, and talking with local customers and competitors. Frontier market investing often requires additional time and due diligence to assess the quality of the management team including more frequent on site visits to evaluate the business effectively.

Which countries and sectors in frontier markets look interesting?

We do not favor any particular market but select stocks which are the most attractive across all markets. A look at the breakdown of our frontier market funds country investments will show where we are finding the most bargains at this stage. Currently, our largest exposures are to Nigeria, Saudi Arabia, Egypt, Vietnam, Kazakhstan, Qatar, Ukraine and Argentina. Liquidity is the key concern for most investors, so markets that are the most liquid could attract greater investment flows.

In terms of sectors, our focus has been on what we refer to as the two ‘Cs’: consumers and commodities. Middle class expansion and the deceleration of population growth has triggered rising per capita income and increasing demand for consumer products. This in turn has led to positive earnings growth outlook for consumer-related companies. We look for opportunities not only in areas related to consumer products, such as automobiles and retailing, but also consider services such as finance, banking and telecommunications. Commodities can offer another way to access the high growth trajectory of nations like China and India and take advantage of greater demand. We are look for companies that are strong producers of commodities such as oil, iron ore, aluminum, copper, nickel and platinum. While infrastructure development in emerging markets has led to continued demand for hard commodities, demand for soft commodities such as sugar, cocoa and select grains has also increased. Resource-rich countries in Latin America, too, are benefiting from increasing global demand.

How can investors get exposure frontier markets?

The best way for retail investors to get exposure to frontier markets is to purchase a frontier markets fund. We have two major frontier markets funds. The total assets in our frontier markets funds has grown to about US$1.5 billion, probably making us the largest frontier markets investor. Trying to invest directly for an individual market is simply not practical since access too many of the markets is complex and expensive for the individual.

Source: Mark Mobius, Franklin Templeton Investments – Emerging Markets Overview, May 5, 2011.

Tags: , , , , , , , , , , , , , , , , , , , , , ,
Posted in Brazil, India, Infrastructure, Markets | Comments Off

Africa: Challenges and Outlook (Mobius)

Thursday, April 28th, 2011

by Mark Mobius, Vice-Chairman, Franklin Templeton Investments

In my previous blog, I touched on some of the opportunities I saw in Africa. In this post, I will discuss what I think are the continent’s key challenges and my outlook for the region.

Corruption is a major problem in Africa. However, it takes two to tango, so accusations of corruption against African governments could also potentially be lodged against entities in the developed world that seek to buy the influence of these governments. One important development has been the Cardin-Lugar amendment to the Dodd-Frank finance reform bill in theU.S., requiring among other things, that oil, natural gas and mining companies registered on the New York Stock Exchange disclose any payment made to a foreign government for the purpose of the commercial development of oil, natural gas or minerals. Some believe that the Cardin-Lugar amendment is more important to Africa than the debt relief of the last decade.

The sentiments that arose in recent tensions in North African countries such as Tunisia, Egypt and Libya have spread not only to other African and Middle Eastern countries but also to Asia and other parts of the world. I believe regimes that do not have the support of the public and have not been elected democratically are likely to come under increased pressure going forward. Such a transition could lead to periods of volatility, as we continue to see in the Middle East and North Africa. While these events can be distressing and sometimes have a very high personal cost, it is important to consider how these developments can act as building blocks for the future, with increasing economic and political freedom being very positive for the welfare of individual countries as well as the overall region in the long term. Wherever we invest, we do consider these risks and factor them into our investment decisions.

Despite Africa’s problems, I believe the long-term outlook for the continent is bright. With its substantial wealth in natural resources such as gold, oil, platinum, iron ore, copper and large areas of arable land, Africa is well-placed to benefit from increased growth and higher demand in emerging markets such asChinaandIndia. In 2010, Anand Sharma, India’s Minister of Commerce and Industry, announced that the Indian government planned to invest US$1 trillion in Nigeria and other parts of Africa during the next decade. In countries such as Angola, Nigeria and Ethiopia, rapid economic growth has resulted in better living conditions, lower child mortality, higher primary school enrollment and greater access to clean water. As larger emerging markets increasingly invest in Africa, we are seeing a lot of money funneled toward infrastructure projects such as roads, bridges, schools and hospitals, all which are likely to benefit African economies over the years to come.

Tags: , , , , , , , , , , , , , , , , , , , , , ,
Posted in India, Infrastructure, Markets | Comments Off