Mark Mobius' World View
The legendary international investor discusses his favorite emerging-markets stocks and one U.S-based alternative.
Just a handful of emerging markets were safe for investing a quarter century ago.
But with explosive growth, emerging-market economies today account for roughly a third of the world's economy. Combined with reforms that make investing more palatable, Mark Mobius and his acolytes at Franklin Templeton now oversee a group of equity funds with $50 billion at work in 60 developing countries.
Manager's Bio
Name: Mark Mobius
Age: 76
Title: Chairman, Franklin Templeton Emerging Markets Group
Education: BA and MS in communications from Boston University, PhD in economics from MIT.
Free Time: cycling, reading
Age: 76
Title: Chairman, Franklin Templeton Emerging Markets Group
Education: BA and MS in communications from Boston University, PhD in economics from MIT.
Free Time: cycling, reading
Mobius' storied investing career took off in the late 1980s under the tutelage of Sir John Templeton, who despite his fame as an investor never lost his humility. It's a trait Mobius has needed as a zealot for emerging markets, which he thinks are underrepresented in portfolios -- due in part to quirks of indexed funds. Indeed, emerging markets, despite significant risks, have obvious appeal: compared to developed countries, they are growing at a much faster clip, with less debt and greater foreign-exchange reserves.
So we caught Mobius by phone, as he traveled in Thailand, to ask what investment themes top his list (China, frontier markets and smallcaps), what's misunderstood (the Middle East) and what's reasonably priced (an awful lot).
Mobius sees his vocation – jetting to remote locales to research companies and economies -- as an avocation. That kept his spirits up as emerging markets declined this year: the MSCI emerging markets index fell 5% through November. The Mark Mobius' World View
By DIMITRA DEFOTIS | MORE ARTICLES BY AUTHOR
The legendary international investor discusses his favorite emerging-markets stocks and one U.S-based alternative.
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Just a handful of emerging markets were safe for investing a quarter century ago.
But with explosive growth, emerging-market economies today account for roughly a third of the world's economy. Combined with reforms that make investing more palatable, Mark Mobius and his acolytes at Franklin Templeton now oversee a group of equity funds with $50 billion at work in 60 developing countries.
Manager's Bio
[image]
Name: Mark Mobius
Age: 76
Title: Chairman, Franklin Templeton Emerging Markets Group
Education: BA and MS in communications from Boston University, PhD in economics from MIT.
Free Time: cycling, reading
Mobius' storied investing career took off in the late 1980s under the tutelage of Sir John Templeton, who despite his fame as an investor never lost his humility. It's a trait Mobius has needed as a zealot for emerging markets, which he thinks are underrepresented in portfolios -- due in part to quirks of indexed funds. Indeed, emerging markets, despite significant risks, have obvious appeal: compared to developed countries, they are growing at a much faster clip, with less debt and greater foreign-exchange reserves.
So we caught Mobius by phone, as he traveled in Thailand, to ask what investment themes top his list (China, frontier markets and smallcaps), what's misunderstood (the Middle East) and what's reasonably priced (an awful lot).
Mobius sees his vocation – jetting to remote locales to research companies and economies -- as an avocation. That kept his spirits up as emerging markets declined this year: the MSCI emerging markets index fell 5% through November. The Templeton Developing Markets Trust fund (ticker: TDMTX), one of Franklin Templeton's largest choices for U.S. investors, has outpaced emerging market indices by several points this year and over time. But his performance has taken a hit with big declines in commodity-driven equities.
Still, Mobius remains optimistic that emerging markets, over time, will outperform the broader market.
Barron's: What is the most important theme in your investment decisions?
Mobius: Expanding consumerism globally. The emerging market consumer is getting richer and is expanding his and her horizons beyond the cash economy and into a credit economy. Disposable income is increasing. This is providing some very big opportunities for any supplier of goods and services to these new consumers.
Q: How does central bank activity affect your strategy?
A: What you have to focus on is not necessarily tapering, but on the total amount of liquidity in the global marketplace. I think too many people have been focusing only on the U.S. [while] balance sheets of central banks around the world have expanded dramatically. Most countries have been engaged in competitive devaluations and you can see that in Brazil and other parts of the world.
Q: What fund strategies do you predict will do well in the next year?
A: Frontier funds and small cap funds are particularly notable, but there is no guarantee.
Fund Facts
(as of Dec. 26, 2013)
Templeton Developing Markets Trust (TDMTX):
Assets: $2.1 billion
Expense Ratio: 2.43%
Front Load: 1.00%
Annual Portfolio Turnover: 26%
Yield (before fees): 1.04%
Source: Morningstar.com
Q: What frontier markets have appeal?
A: Africa is one we are eyeing. We particularly like Nigeria, Kenya and Ghana. Other interesting markets include Vietnam, Romania, Ukraine and Peru. In essence, frontier markets represent what emerging market countries like Brazil, Russia, India and China were 20 years ago. They have continued to increase investments in infrastructure and are leading producers of important commodities positioned to benefit from growing global demand. Many frontier stocks are trading at valuations below those of most developed and emerging markets.
Q: What is appealing about smallcaps?
A: Many smaller companies are often at an earlier stage in their life cycle, and thus can offer the potential [for] faster growth than the broader equity market. Some can grow to be giants of the future. Data uncovered by research into smaller companies can add significantly to our understanding of underlying conditions in emerging-market economies. The potential negatives are manageable: a costlier research effort, information shortfalls, increased volatility -- particularly short term -- and limited liquidity.
Q: Aren't large, multinational companies a safer way to capture EM growth?
A: We own some of those companies. Avon Products (AVP), in our view, is an emerging market company because over 50% of its earnings are in emerging markets.
Q: And Avon's valuation?
A: We like the long-term valuation possibilities. Avon is trading at less than 12 times earnings, but was trading at approximately 17 times in May. Avon has a much more attractive valuation than [local competitor] Natura Cosmeticos (NATU3. Brazil). Natura was trading near 30 times earlier this year and now is trading at approximately 21 times. So we are looking at that closely.
Q: What about Avon's corruption charges in China?
A: Hopefully we will have some closure this year or beginning of next year.
Q: Is there a place where you won't invest because of corruption?
A: No. At the company level, if corporate governance is not good, we will not invest. At the country level, the only reason why we would not invest is if foreign exchange controls prevent us from getting money out of the country, or if the government states that it will take over assets.
Q: An example?
A: Venezuela.
Q: Among countries, do you have a favorite place to invest?
A: I would say China has got to be at the top of our list because of the growth.
Q: What kind of GDP growth and earnings growth do you expect in China next year?
A: Seven percent [economic] growth. As a general rule, you can double the economic number to get a number for earnings growth. For China, we're looking at least 14% earnings growth.
Q: What do you think of stock valuations in the Chinese market?
A: Equity valuations overall are not much above their 2008 lows, and we believe that many of China's A-shares are attractively priced. The A-share market … gives an investor more opportunities to invest in smaller companies and sectors. such as tourism, pharmaceuticals, consumer and biotechnology [versus] H-shares or red chips.
Q: Guangzhou Automobile Group (2238.HongKong) is a large holding. What else do you like?
A: We also own Great Wall Motor (2333.HongKong), the automobile manufacturer. In our Asia Fund, we have Brilliance China Automotive Holdings (1114.HongKong), which is the [joint venture] BMW manufacturer benefiting from growing consumerism in China. We also own Giordano International (709.HongKong), the clothing manufacturer. Sands China (SCHYY) with their big success in Macau is of great interest.
Q: Energy investments like PetroChina (PTR), down about 20% this year, have hurt your performance.
A: We like some diversified oil companies [with] not only exploration and production, and refining, but also retail sales. For energy, oil companies, gas companies, we believe that demand will continue to go up. For energy prices, the trend is up. We are not going to see a dramatic fall in the price of oil or gas. We want to be in that space.
Q: Shares of Vale (VALE), Brazil's metals and mining giant, fell 30% this year, a drag on your returns. What do you like in Latin America?
A: We like Colombia. We like Chile and there are certain bombed-out areas like Argentina, which have some stocks that might be of interest. Brazil is the big boy on the block in Latin America and that's the reason why we like beverage distributor Ambev (ABEV). It is the leader in beer and soft drinks in 14 countries in the Americas. The brands include Bohemia, Stella Artois. They are a big bottler of Pepsi. Most importantly their market share is excellent in these countries. And Ambev was trading at 28x in the beginning of 2013 and is trading at approximately 25 times.
Q: What are your expectations for Brazil's GDP?
A: About 3% economic growth this year. Next year, maybe 4% or 5% economic growth and about 10% earnings growth.
Q: What do you like in Argentina?
A: It is a very unstable situation. However, Argentina is a good example of where you have to separate the political environment from what is happening at the company level. That is not a blanket endorsement. But … there are survivors because many companies in Argentina are global in nature. We hold the American Depositary Receipts of Ternium (TX), a steel production and iron-ore mining company, and Tenaris (TS), which produces steel tubing. [Each is based in Luxembourg.] With bad news around Argentina, valuations have come down attractive levels.
Q: Where is economic and earnings potential overlooked?
A: I look at the Middle East and the Cooperation Council for the Arab States of the Gulf Coast. Growth is going to be a lot better than people expect.
Q: Why?
A: An agreement with Iran will result in a lot economic activity in the region. The low-tax environment in these countries is very encouraging. That is particularly true in the United Arab Emirates. One of our top holdings is in the UAE, in Dubai. The property developer Emaar Properties (EMAAR.UAE). They are developers of shopping malls, hotels, department stores. They are now benefiting from the recovery of the property market in the Middle East and especially in Dubai, where there is a new-property boom. They are also in Saudi Arabia, in Turkey and other places.
Q: Foreign money has been exiting Turkey, the market there has fallen sharply and the Turkish lira is weakening. What's going on?
A: There has been a continuing series of challenges to the government of Prime Minister Recep Tayyip Erdogan. First is the challenge by the youth and Westernized Istanbul elites who are against the more radical Islamic principles being imposed by Erdogan. [Last summer], this opposition culminated in peaceful protests against the government¹s plans to redevelop a park near Taksim Square in Istanbul. This was met with police tear gas and water cannons and ignited riots and a public uproar. This highlighted the fundamental political conflict in Turkey between those who want a secular state and those who prefer an Islam-based government. Second, with high dependence on foreign portfolio flows, the balance of payments situation deteriorated. There were fears that the U.S. Federal Reserve would turn off the money tap, depriving Turkey of needed liquidity to protect the weakening Turkish lira [leading to] a possible problem in paying foreign debts. More recently, a series of corruption scandals erupted reaching the highest levels of government and challenging Erdogan¹s party. Ministers [have resigned who] have been with Erdogan for many years. There are splits within the ruling party. There will be political turmoil. But in the end, the uncovering of corruption is a positive development for the country from a long-term point of view
Q: Greece is now an emerging market and you were quoted recently saying Greece looked interesting. Any purchases there?
A: No. But we are looking very intensely. The market is no longer a screaming bargain. But we are considering it.
Q: What do you think of bitcoin?
A: Bitcoin is an interesting answer to increasing suspicion generally surrounding currencies.
Q: Will governments come around to it?
A: I'm very doubtful. Governments want to control their currencies. They lose if bitcoin is a legitimate currency.
Q: So you don't think it has a future.
A: It has a future, in a limited environment.
Q: A new currency limited to certain internet transactions?
A: Exactly.
Q: You are a prolific writer. Apart from your books, do you author everything on your exhaustive blog?
A: I have people who help. But actually I've written most of that stuff. I'm constantly writing as I travel.
Top Ten Holdings
(as of Nov. 30, 2013)
Ambev (ABEV3.Brazil)
Souza Cruz (CRUZ3.Brazil)
Remgro (REM.South Africa)
Sands China (1928.HongKong)
Tata Consultancy Services (TCS.India)
Sberbank of Russia (SBER.Russia)
Melco Crown Entertainment (6883.HongKong)
SJM Holding (880.HongKong)
Samsung Electronics (005930.SouthKorea)
Compagnie Financiere Richemont (CFR.Switzerland)
Source: FranklinTempleton.com
Q: Recall an amazing meal from your global jaunts.
A: Probably a Singapore restaurant specializing in medicinal food. One course had many insects. One of them was a-sort-of-a baked insect on toast. That was probably the most memorable meal I've had.
Q: You ate it?
A: Yes. It was good. It was crunchy and a little salty.
Q: Sounds like emerging market returns. Thanks, Mark. (ticker: TDMTX), one of Franklin Templeton's largest choices for U.S. investors, has outpaced emerging market indices by several points this year and over time. But his performance has taken a hit with big declines in commodity-driven equities.
Still, Mobius remains optimistic that emerging markets, over time, will outperform the broader market.
Barron's: What is the most important theme in your investment decisions?
Mobius: Expanding consumerism globally. The emerging market consumer is getting richer and is expanding his and her horizons beyond the cash economy and into a credit economy. Disposable income is increasing. This is providing some very big opportunities for any supplier of goods and services to these new consumers.
Q: How does central bank activity affect your strategy?
A: What you have to focus on is not necessarily tapering, but on the total amount of liquidity in the global marketplace. I think too many people have been focusing only on the U.S. [while] balance sheets of central banks around the world have expanded dramatically. Most countries have been engaged in competitive devaluations and you can see that in Brazil and other parts of the world.
Q: What fund strategies do you predict will do well in the next year?
A: Frontier funds and small cap funds are particularly notable, but there is no guarantee.
Fund Facts
(as of Dec. 26, 2013)
Templeton Developing Markets Trust(TDMTX):
Templeton Developing Markets Trust(TDMTX):
| Assets: | $2.1 billion |
| Expense Ratio: | 2.43% |
| Front Load: | 1.00% |
| Annual Portfolio Turnover: | 26% |
| Yield (before fees): | 1.04% |
Source: Morningstar.com
Q: What frontier markets have appeal?
A: Africa is one we are eyeing. We particularly like Nigeria, Kenya and Ghana. Other interesting markets include Vietnam, Romania, Ukraine and Peru. In essence, frontier markets represent what emerging market countries like Brazil, Russia, India and China were 20 years ago. They have continued to increase investments in infrastructure and are leading producers of important commodities positioned to benefit from growing global demand. Many frontier stocks are trading at valuations below those of most developed and emerging markets.
Q: What is appealing about smallcaps?
A: Many smaller companies are often at an earlier stage in their life cycle, and thus can offer the potential [for] faster growth than the broader equity market. Some can grow to be giants of the future. Data uncovered by research into smaller companies can add significantly to our understanding of underlying conditions in emerging-market economies. The potential negatives are manageable: a costlier research effort, information shortfalls, increased volatility -- particularly short term -- and limited liquidity.
Q: Aren't large, multinational companies a safer way to capture EM growth?
A: We own some of those companies. Avon Products (AVP), in our view, is an emerging market company because over 50% of its earnings are in emerging markets.
Q: And Avon's valuation?
A: We like the long-term valuation possibilities. Avon is trading at less than 12 times earnings, but was trading at approximately 17 times in May. Avon has a much more attractive valuation than [local competitor] Natura Cosmeticos (NATU3. Brazil). Natura was trading near 30 times earlier this year and now is trading at approximately 21 times. So we are looking at that closely.
Q: What about Avon's corruption charges in China?
A: Hopefully we will have some closure this year or beginning of next year.
Q: Is there a place where you won't invest because of corruption?
A: No. At the company level, if corporate governance is not good, we will not invest. At the country level, the only reason why we would not invest is if foreign exchange controls prevent us from getting money out of the country, or if the government states that it will take over assets.
Q: An example?
A: Venezuela.
Q: Among countries, do you have a favorite place to invest?
A: I would say China has got to be at the top of our list because of the growth.
Q: What kind of GDP growth and earnings growth do you expect in China next year?
A: Seven percent [economic] growth. As a general rule, you can double the economic number to get a number for earnings growth. For China, we're looking at least 14% earnings growth.
Q: What do you think of stock valuations in the Chinese market?
A: Equity valuations overall are not much above their 2008 lows, and we believe that many of China's A-shares are attractively priced. The A-share market … gives an investor more opportunities to invest in smaller companies and sectors. such as tourism, pharmaceuticals, consumer and biotechnology [versus] H-shares or red chips.
Q: Guangzhou Automobile Group (2238.HongKong) is a large holding. What else do you like?
A: We also own Great Wall Motor (2333.HongKong), the automobile manufacturer. In our Asia Fund, we have Brilliance China Automotive Holdings (1114.HongKong), which is the [joint venture] BMW manufacturer benefiting from growing consumerism in China. We also own Giordano International (709.HongKong), the clothing manufacturer. Sands China (SCHYY) with their big success in Macau is of great interest.
Q: Energy investments like PetroChina (PTR), down about 20% this year, have hurt your performance.
A: We like some diversified oil companies [with] not only exploration and production, and refining, but also retail sales. For energy, oil companies, gas companies, we believe that demand will continue to go up. For energy prices, the trend is up. We are not going to see a dramatic fall in the price of oil or gas. We want to be in that space.
Q: Shares of Vale (VALE), Brazil's metals and mining giant, fell 30% this year, a drag on your returns. What do you like in Latin America?
A: We like Colombia. We like Chile and there are certain bombed-out areas like Argentina, which have some stocks that might be of interest. Brazil is the big boy on the block in Latin America and that's the reason why we like beverage distributor Ambev(ABEV). It is the leader in beer and soft drinks in 14 countries in the Americas. The brands include Bohemia, Stella Artois. They are a big bottler of Pepsi. Most importantly their market share is excellent in these countries. And Ambev was trading at 28x in the beginning of 2013 and is trading at approximately 25 times.
Q: What are your expectations for Brazil's GDP?
A: About 3% economic growth this year. Next year, maybe 4% or 5% economic growth and about 10% earnings growth.
Q: What do you like in Argentina?
A: It is a very unstable situation. However, Argentina is a good example of where you have to separate the political environment from what is happening at the company level. That is not a blanket endorsement. But … there are survivors because many companies in Argentina are global in nature. We hold the American Depositary Receipts of Ternium(TX), a steel production and iron-ore mining company, and Tenaris (TS), which produces steel tubing. [Each is based in Luxembourg.] With bad news around Argentina, valuations have come down attractive levels.
Q: Where is economic and earnings potential overlooked?
A: I look at the Middle East and the Cooperation Council for the Arab States of the Gulf Coast. Growth is going to be a lot better than people expect.
Q: Why?
A: An agreement with Iran will result in a lot economic activity in the region. The low-tax environment in these countries is very encouraging. That is particularly true in the United Arab Emirates. One of our top holdings is in the UAE, in Dubai. The property developer Emaar Properties (EMAAR.UAE). They are developers of shopping malls, hotels, department stores. They are now benefiting from the recovery of the property market in the Middle East and especially in Dubai, where there is a new-property boom. They are also in Saudi Arabia, in Turkey and other places.
Q: Foreign money has been exiting Turkey, the market there has fallen sharply and the Turkish lira is weakening. What's going on?
A: There has been a continuing series of challenges to the government of Prime Minister Recep Tayyip Erdogan. First is the challenge by the youth and Westernized Istanbul elites who are against the more radical Islamic principles being imposed by Erdogan. [Last summer], this opposition culminated in peaceful protests against the government¹s plans to redevelop a park near Taksim Square in Istanbul. This was met with police tear gas and water cannons and ignited riots and a public uproar. This highlighted the fundamental political conflict in Turkey between those who want a secular state and those who prefer an Islam-based government. Second, with high dependence on foreign portfolio flows, the balance of payments situation deteriorated. There were fears that the U.S. Federal Reserve would turn off the money tap, depriving Turkey of needed liquidity to protect the weakening Turkish lira [leading to] a possible problem in paying foreign debts. More recently, a series of corruption scandals erupted reaching the highest levels of government and challenging Erdogan¹s party. Ministers [have resigned who] have been with Erdogan for many years. There are splits within the ruling party. There will be political turmoil. But in the end, the uncovering of corruption is a positive development for the country from a long-term point of view
Q: Greece is now an emerging market and you were quoted recently saying Greece looked interesting. Any purchases there?
A: No. But we are looking very intensely. The market is no longer a screaming bargain. But we are considering it.
Q: What do you think of bitcoin?
A: Bitcoin is an interesting answer to increasing suspicion generally surrounding currencies.
Q: Will governments come around to it?
A: I'm very doubtful. Governments want to control their currencies. They lose if bitcoin is a legitimate currency.
Q: So you don't think it has a future.
A: It has a future, in a limited environment.
Q: A new currency limited to certain internet transactions?
A: Exactly.
Q: You are a prolific writer. Apart from your books, do you author everything on yourexhaustive blog?
A: I have people who help. But actually I've written most of that stuff. I'm constantly writing as I travel.
Top Ten Holdings
(as of Nov. 30, 2013)
| Ambev | (ABEV3.Brazil) |
| Souza Cruz | (CRUZ3.Brazil) |
| Remgro | (REM.South Africa) |
| Sands China | (1928.HongKong) |
| Tata Consultancy Services | (TCS.India) |
| Sberbank of Russia | (SBER.Russia) |
| Melco Crown Entertainment | (6883.HongKong) |
| SJM Holding | (880.HongKong) |
| Samsung Electronics | (005930.SouthKorea) |
| Compagnie Financiere Richemont | (CFR.Switzerland) |
Source: FranklinTempleton.com
Q: Recall an amazing meal from your global jaunts.
A: Probably a Singapore restaurant specializing in medicinal food. One course had many insects. One of them was a-sort-of-a baked insect on toast. That was probably the most memorable meal I've had.
Q: You ate it?
A: Yes. It was good. It was crunchy and a little salty.
Q: Sounds like emerging market returns. Thanks, Mark.
