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.”
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
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+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.
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
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-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.
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.
