5 money moves Mark Mobius is making now Emerging markets veteran is bullish on consumers, commodities, energy

By Jonathan Burton, MarketWatch

SAN FRANCISCO (MarketWatch) — Mark Mobius may be the only mutual fund manager ever to be the subject of a comic book, and certainly the only one to earn the title of “Father of Emerging Markets Funds.”

Mark Mobius.

The Thai edition is sold out, but of the Japanese manga comic is available in Chinese, Korean, Japanese, Indonesian, and English.

Such is the mystique of Mobius, a pioneer investor in emerging markets, builder of the BRICs, and an early believer in the power of globalization and the potential for developing Asia, Latin America, the Middle East and Africa, as well as Russia, to compete on the world stage.

As Executive Chairman of Templeton Emerging Markets Group, a unit of mutual-fund giant Franklin Resources Inc. BEN -0.04% , Mobius oversees around $40 billion in assets, including his Templeton Frontier Markets Fund TFMAX +0.30% , Templeton BRIC Fund TABRX +0.33% and Templeton Developing Markets Fund TEDMX +0.31% .  

Emerging markets investors were hammered in 2011. The uncertainty and volatility that swept the U.S. and the euro zone hit emerging countries harder, reflecting concern that these regions’ growth would decline sharply. Yet emerging markets have rebounded nicely so far this year as investors have become more optimistic that the worst of the euro-zone debt crisis has been priced in — a position Mobius took in a late 2011 telephone interview, as well as later emailed remarks.

“It’s not the end of the world; this will be worked out,” Mobius said. “Europe will not disappear; the euro will not disappear. There will be a solution. Of course, people will have to pay for that solution.”

Indeed, Mobius is a confirmed euro bull. “There are challenges, such as member countries’ need to control government spending, but once these are sorted out, I believe the euro should be very successful and, in fact, it could possibly play a greater role in the global economy in 2020,” Mobius said.

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A robust European currency would be a plus for emerging nations that are major exporters to Europe. Even without this tailwind, Mobius points out, many emerging economies sport impressive growth rates of three or four times that of developed markets. In addition, these countries have little to no debt and high levels of foreign reserves.

“These fundamental strengths are likely to continue in the months and years ahead, and eventually be reflected in the earnings and share prices of emerging-market companies, over time,” Mobius said.

Moreover, developed-market growth is expected to remain anemic, which shifts attention to the growing consumer class in emerging markets. It remains to be seen whether domestic demand can offset the economic pinch from the developed-market slowdown, but Mobius is confident that it will have an impact.

“With emerging markets,” he said, “growth in domestic consumption should be driven by, and hopefully sustained, in two ways: rising per capita income and, more importantly, the maturing of the young, working population who will be reaching the most productive years of their lives.”

Yet a smooth transition is by no means guaranteed, Mobius cautioned: “If governments fail to keep up with this new and rising middle-consumer class, through a lack of employment and high unproductive government spending that could in turn lead to inflation, this could lead to political instability, a persistent poverty trap and a widening gap between the rich and the poor.”

Sustained high inflation is in fact the main risk to the emerging-market growth story, Mobius said.

“In an environment of slowing global growth and easing inflationary pressures, emerging markets tend to revert their attention to stimulating economic growth,” he said. “Inflation is a big challenge, and I believe it will probably be a very important consideration going forward.”

So Mobius has positioned his funds’ portfolios for any possibility. He’s invested in cyclical areas such as energy, commodities and materials, as well as having large investments in food and other staples that wealthier consumers can now afford.

And as someone who has seen emerging markets boom, bubble and bust, Mobius is also realistic about the need for investors in these parts of the world to show tremendous patience — which, he said, will be rewarded.

“There of course will be leads and lags in the movement of markets but it is clear that over the longer term emerging markets will outperform developed countries,” Mobius said.

With that in mind, here are five areas where Mobius is investing now:

1. Stick with the energy sector

Economic development and urbanization in emerging countries means that energy demand is increasing rapidly. Mobius noted. At the same time, he added, suppliers of gas and oil have become much more sophisticated about pricing. Accordingly, prices can be maintained at high levels, and as an investor Mobius looks to energy companies with a dominant share of this favorable dynamic.

For instance, he said, “we like to go into diversified oil companies that have the whole gamut: production,exploration, refining, distribution, gas stations.” 

Mobius is also sanguine about Russia, which, he said, “is now in a strong fiscal position with very high foreign reserves and a continuing good market for their oil, gas and mineral exports.”

As an example, he points to Gazprom OGZPY +1.96% , which is a major supplier of gas to Europe and also sells to China and other parts of Asia.

Electric power is also a big focus. “It’s all about electric energy,” Mobius said. From cellular towers to office towers, “everybody needs electricity,” he added.

Investors have to be careful about electric utilities, which can be subject to excessive regulation, he cautioned. Brazil has a model system, Mobius said, that balances government regulation against shareholders’ need for return on capital and investment.

2. Software delivers hard profits

Information technology and software is a growth story — particularly for India, Mobius said.

“Some terrific software companies in India do global software and outsourcing work,” he said, citing Infosys Ltd. INFY -0.02%  and Tata Consultancy Services Ltd. IN:532540 +1.46%  as examples.

“They’re a beneficiary of the global outsourcing trend,” Mobius added. “They have tremendous experience. Their ability is quite remarkable. Every day they are hiring and training thousands of workers in the software business, and their ability to do this is quite exceptional and unique. A lot of people complain about software companies taking American jobs — they are hiring in America.”

3. Financial services can pay off

Banking is a risky play, but Mobius said he sees opportunities in emerging-market financial services firms with strong balance sheets and a focus on consumers.

Brazil offers some attractive candidates, he said. Institutions including Itau Unibanco Holding ITUB +0.48%  and Banco Bradesco BBD -0.65%  haven’t had to expand beyond their own sizeable home market, Mobius noted; plus Brazil’s banking community is no stranger to sovereign debt troubles and challenging economic environments.

Mobius is generally bullish about Brazil, but as an investor he is watching for signs that the government is managing spending and keeping a lid on inflation. Long term, he said, “Brazil should be focused on increasing productivity, especially in light of such a strong currency. There should be structural reforms in areas such as education, tax, pension, the political system, privatizations and efforts to attract infrastructure investments.”

4. Have confidence in consumers

Mobius travels constantly, intent on seeing potential investments up close. For example, in China, he said, shopping malls are full with customers, and that spurs Mobius to think about the implications for consumer companies, electricity providers, material suppliers and other industries that support and benefit from consumer demand.

“Middle class expansion and the deceleration of population growth has triggered rising per capita income and increasing demand for consumer products,” Mobius said. “This in turn has led to a 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.

“People want these things and there’s no inhibitions,” he added.

Yet being an astute social observer is one thing; investing in societal trends is another.

“I may like a certain sector, but if the companies are not cheap I’m not interested,” Mobius said. “I’d love to buy consumer companies in China, but many of them are very expensive.”

So Mobius looks elsewhere for similar plays. “I may go to Brazil and buy a food company that’s cheaper and still has the growth characteristics,” he said.

As an example, he pointed to South American beverage leader Companhia de Bebidas das Americas, or Ambev, ABV -0.87%   BR:AMBV4 -0.49% . The company is a unit of Anheuser-Busch InBev N.V. BUD +0.06%   BE:ABI -1.03% , the global brewery giant. 

5. Commodities and materials are building blocks

The consumer has always been a main driver of demand for commodities and materials. But the sea change in the economic fortune of people in emerging economies — China and India together represent more than one-third of the world’s population — has created an unprecedented need for food and raw materials.

Companies that extract, grow, produce, refine and transport these goods — and do so cheaper and better than others — have enjoyed strong earnings growth. Mobius sees nothing fundamentally that would break this flow. He looks for higher commodity prices due to unbroken demand and spotty supply.

“I am very positive on all the commodities,” he said. “Commodity stocks continue to look good because we expect the global demand for commodities to continue its long-term growth.

“We generally look for companies that are strong producers of commodities such as oil, iron ore, aluminum, copper, nickel and platinum,” he added. In areas of agriculture and ranching, he points to sugar, meat, corn, soybeans, cocoa and select grains.

The difficulty, Mobius said, is that while demand appears infinite, supply and production is not. Raising an animal for meat, he said, requires more grain, more land and more water than growing soybeans, for example. At some point the cost will outweigh the benefit, he noted, and people’s wants and expectations will have to change.

“There has to be a new paradigm where people just use less,” Mobius said. “We’re going to have to get to that, sooner or later.”

MarketWatch reporter Phani Kumar in Hong Kong contributed to this report.

Jonathan Burton is MarketWatch's money and investing editor, based in San Francisco.