The continuous search for cheap, promising stocks in both the familiar and far-flung markets of the world has seen Mark Mobius, the head of Templeton Asset Management, become a wealthy, nomadic investor and occasional travel journalist, SIMON MUMME writes.
Bad markets can bring good news to Mark Mobius, a renowned emerging markets investor who travels, with the aid of a company-owned US$20 million Gulfstream IV jet, roughly 300 days each year to various patches of the globe to oversee portfolios. The current down markets and high inflation in emerging economies, it seems, are familiar territory for the value manager, who says that profits are made after, not before, these events. “We are now in a bear market. We have had three since December 2005,” says Mobius, executive chairman of Templeton Asset Management. “We’re three months into it, and the worst that we expect is one and a half years of this going ahead.”
In the 40 years since the late Sir John Templeton began investing in emerging markets (which, at the outset, included Japan), the business he founded has rode out wars, revolutions and government coups in addition to an assortment of global financial crises: the 1970s oil troubles, Black Monday, the 1993 Mexican peso crisis, the Asian currency meltdown, the 1998 default in Russian government debt and demise of hedge fund Long-Term Capital Management, the 2000 dotcom bust and the present credit crisis.
For Mobius, there are two sides to each downturn – while short-term performance suffers, bargains abound. The cornerstone of Sir John’s investment approach is still quoted as the firm’s guiding principle: “to buy when others are despondently selling and sell when others are greedily buying”. But while pessimism in emerging markets drives down the prices of stocks, there is sometimes not enough liquidity to fully take advantage of the devaluations, Mobius says.
He is confident, however, that liquidity will return. The basis of this judgment is the M3 measure of money supply that Templeton constructs from weekly US Federal Reserve reports, which provides an understanding of how much money the Fed is pumping into markets. Mobius says the M3 shows a rate of growth in money supply of approximately 15 per cent during August, up from 10 per cent in July. “We expect there to be continuing net outflows from markets, but not on a massive scale. The bottom line is that the Fed continues to pump money out into the system and that is creating a continuing flow.”
He also talks down the rising rates of inflation across emerging markets. While Vietnam battles a rate of 25 per cent, and the average across the emerging world looms at 9.3 per cent in comparison to that of the US at 5.5 per cent, the problem is nowhere near the scale of 1990, when inflation across emerging markets climbed close to 90 per cent. But there are still valid concerns. “Since 2006, inflation in the emerging markets has been accelerating. Compared to the US, it is twice as high.”
Looking beyond these setbacks, Templeton expects the commodities and consumer goods sectors, and increasing overall trade in emerging markets, to lead growth in the asset class in coming years. “There are more people and more consumers in the emerging markets. That’s where you have to be. And per capita income in these countries is growing at a rapid rate – which means more consumers.”
In the five years to 2007, gross domestic product (GDP) growth per capita in developed markets was 38 per cent. In emerging markets, it was 110 per cent, Templeton calculates. Trade involving the emerging markets as a percentage of global trade is now 45 per cent, indicating that, while the US is important, it is “no longer the driver of trade.”
The showcase consumer item amid this growth in projected consumer demand is the mobile phone, Mobius says. The market penetration rate of mobile phones among Italians is 153 per cent and 122 per cent in the UK. In China and India, which have far larger populations, the respective penetration rates are 43 per cent and 23 per cent. “They are far behind, and we believe they will catch up.”
But macroeconomic momentum does not necessarily make stock selection an easy job. The persistent challenges of emerging markets – from inaccurate disclosure of company information, shoddy corporate governance and volatility, to political and social unrest – mean that investors can be susceptible to hidden risks. Once, when Templeton was checking up on an investment it had made in a Brazilian apartment block developer, analysts were met by a financial manager from the business who said the numbers were solid and all was in order. Some months later, the company collapsed. Upon visiting the Comissão de Valores Mobiliários, the market regulator, to find out what action could be taken, Templeton was greeted by the same financial manager, dressed in official clothes. “We had nothing to say,” Mobius says.
“Our work is never done. Companies lie. They lie straight to your face. You need to look at the numbers and read between the lines, and talk to competitors. You need to know who owns what, and who’s doing what with which people. “Sometimes, in the family-owned companies, the slick, well-groomed son might be up the front but it’s really the father that’s running the show.”
Developing some knowledge of the geopoliticial and ethnic tensions of regions and how these histories influence business is also a valuable input into analyses of the long-term viability of companies and economies. “You need to understand where they are now in terms of where they were.” These interests, and the social circles that Mobius inhabits, have opened another occupational opportunity. More than a year ago, after writing a travel story for Prestige magazine, he was asked at a party by an executive at British social magazine Tatler to pen a monthly column for its travel instalment.
In his book, Passport to Profits, Mobius presents a candid insight into his professional motivations: “sometimes I wonder if I travel to run money, or run money to travel”.
Money (or your life) on the frontier
The adoption of market economy models and privatisation of state-owned enterprises has put the next emerging economies, the frontier markets, within Templeton’s scope. The economies of countries spanning Asia, Latin America, southern Europe and the Middle East and North Africa have the potential to grow fast, but with severe volatility. They resemble today’s emerging markets 20 years ago, Mobius says.
He forecasts the markets of Qatar, the United Arab Emirates (UAE) and Panama to grow 11.8 per cent, 8.4 per cent and 7.0 per cent respectively in 2008. In contrast, the US, UK and Japan are expected to expand by 1.5 per cent, 1.7 per cent and 1.3 per cent respectively. As the numbers show, this growth is not fully bound to the performance of mature markets. The correlation coefficient between the Standard & Poor’s Frontier Markets Index in comparison to the three major MSCI Indices, the MSCI World, MSCI Europe and MSCI Emerging Markets, stands at 0.6. It follows that they have not been affected by the credit troubles to the extent that the developed world has.
In the one-year period ended June 2008, the S&P/IFCG Bangladesh, Cote d’Ivoire and Mauritius indices returned about 60 per cent in US dollar terms, while the S&P/IFCG Lebanon index returned more than 100 per cent, Mobius says. Other markets such as Trinidad and Tobago, Tunisia, Kenya and the Slovak Republic all returned nearly 30 per cent. Meanwhile, the MSCI World index has declined by 10 per cent in US dollar terms.
Many stocks in frontier markets also fit into Mobius’ favourite category: bargain. The markets of Estonia, Kazakhstan, Latvia and Panama, for example, are all trading at a price-to-earnings ratio lower than eight. In comparison, the US and Japan are trading at measures of 17 and 16 respectively. Since few asset management firms or brokerages are actively pushing out the frontier, early investors can take better advantage of their inherent inefficiencies.
As if the listed markets of emerging and frontier economies are not interesting or challenging enough, Templeton has sought private transactions in these countries. It holds investments in manufacturers of wind power engines, tyres, fruit juice and, prospectively, abalone and amino acid pills. The deals tend to involve manufacturing and consumer businesses. Mobius says there are more private equity targets in these sectors within frontier markets, since similar opportunities in emerging markets were long ago gulped up by multinationals. While smooth transactions are rarely expected in these markets, they are not as troublesome as some outsiders might assume. “People think that Russia is lawless and unsafe. Some of the best private equity deals that we’ve got have been there.”
But it does not necessarily require any infringement of the law to see the value of a stock holding or private deal head south. “The biggest fear we have is not being able to get out. We’re willing to take the internal risk of prices going down, but we would hate to not get money out.”
This fear has kept the firm from private equity investments in China. To manage this risk in Vietnam, Templeton has structured some of its allocations as loans to be repaid, not equity.