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Emerging: Brazil, China, and Pakistan?

Mark Mobius is a legend among emerging-market investors. For more than 30 years, the 73-year-old fund manager, who oversees $33 billion spread across 35 Franklin Templeton funds, has scouted for investment opportunities in unlikely places. His U.S.-listed Templeton Emerging Markets Fund (EMF)had a 109% return as of Dec. 14, compared with 73% for the MSCI Emerging Markets Index. Hong Kong-based correspondent Frederik Balfour caught up with Mobius by phone as the fund manager was visiting Doha, Qatar—one stop on an itinerary that included Dubai, Lebanon, Saudi Arabia, and Libya.

What was behind the huge runup in emerging markets in 2009?

With the subprime shock, everybody was looking for safety. And for some strange reason, they thought the U.S. dollar was safe and went into money market funds until January or February of 2009. Then people began to wake up to a few things. One was that the supply of currency would at some time outpace demand, so value would decrease. In China there was 21% growth of money supply, and in the U.S. 18% to 20%. That created this incredible liquidity looking for a home as people woke up [to the fact] that they should think about inflation coming down the pike. They weren't getting any yield on dollar deposits, so equities were the obvious answer.

Have emerging markets moved too far too fast?

The percentage increases are a bit misleading because you are coming from a low base. We are only halfway toward the previous high of 1997. Have we gone too far? The only measure we have is valuations, and probably the best single measure is price-to-book value ratio. [Book value is a measure analysts use to estimate what a share of stock would be worth if all the company's tangible assets—factories, real estate, and so on—were liquidated.] If you look at the average price-to-book ratio based on the stocks in the MSCI Emerging Markets Index, we are only halfway to the 1997 high. The absolute high was three times book, the low was one times book, and now we are at two times book, roughly.

Could things reverse course?

You better believe there are a lot of hedge funds out there betting against this rally. That provides more volatility. It's a self-feeding situation. You have to be aware that the volatility will be there and there is nothing you can do about it.

Apart from all the money in the system, what is driving the emerging-market rally?

Fundamentals. If you look at any time period—10 years, 3 years, 1 year—emerging markets have outperformed U.S. and global markets. Their economies are growing faster, four times faster. And during the 1997-1998 Asian crisis [policymakers in] emerging markets realized they needed strong balance sheets at the national and company level and had to build up foreign reserves, which they've done. They were building up reserves, keeping their currencies low, and reducing debt. Their debt-to-gross-domestic-product levels are way below developed markets, and when you look at the foreign exchange picture, it's even more impressive. Russia has $400 billion in reserves; China, $2 trillion. So where do you want to put your money? Obviously, emerging markets are the place.

How did the panic caused by property developer Dubai World's debt woes affect the appetite for emerging-market stocks?

There was some retreat, but it was very short-lived. Dubai keeps on tanking because of uncertainty. Emerging markets hardly missed a beat.

What markets are you keen on?

Brazil and China. Our funds are big, so obviously we want to be in a place where there is good liquidity. But we are also looking at many other markets. We have a frontier-markets fund that we launched about a year ago—we have one fund in the U.S., one in Europe, and one in Korea. Korean investors have become quite global.

What new markets have you entered?

Well, I was just in Libya and Algeria, though it will be a while before we [invest] there.

Regions : Asia

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