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Bottom-Fishing in a Cash Tsunami
10/01/2009 10:15 am EST
Mark Mobius, executive chairman of Templeton Asset Management, is finding relative value in Russia, Pakistan, and emerging markets in general as the US and China print money.
Q. Emerging markets posted big gains last month. Is this a good time to invest new money?
A. The markets are up a lot—in some cases, more than 100% from the absolute bottom. The percentage changes are very dramatic, but in reality, when you look at valuations in emerging markets, they still are reasonable. So, it's probably a good idea to begin investing, but to dollar-cost average, because there will be volatility and there will be corrections along the way in this bull market.
Q. Why the recent acceleration of the rally?
A. The money supply is being pumped into the markets globally, and not only in the US; China has been increasing money supply at a rate of 20% on an annualized basis. That money supply increase has had a tremendous impact, because that money needs a home.
The other factor is that the Obama administration is catering to the unions, and that means more spending. It also could mean more and more trade friction. A combination of things [is] moving people out of dollars and into equities. Equities are the best protection against inflation.
Q. Just as Obama's policies have attracted some scepticism, so have those of China. There's been talk that the government stimulus is really not addressing real economic problems, that Chinese statistics can't be trusted, and that therefore China's reported growth rate and stock market performance are a sham. How accurate is that?
A. You have to contrast the local Chinese stock market and the H shares in Hong Kong, which are selling at a 30% to 40% discount. In China, money is looking for a home, and it's either property or stocks. So, you do have this tendency towards speculation.
With regard to statistics, I don't think the Chinese [data] are that inaccurate. We've checked and double-checked the GDP numbers and they pretty much match with the electricity consumption and so forth. So, I have no doubt that these growth numbers are there. Whether they are sustainable is another question, because as the economy gets larger, it becomes more difficult to sustain this kind of growth.
Q. You've made the case for the long-term convergence of price-earnings ratios as emerging and frontier markets catch up to the valuations of developed ones.
Does that mean that Russia's market is twice as attractive as China's?
A. There's no question Russia is now very attractive. It doesn't mean it's going to now jump up and perform the way China's performed. And if you look at it from a longer-term view, there's no reason why Russian markets can't outperform China's. They're both moving up. It's just that the difference in valuation could push Russia's up more.
Q. Is that currently your favorite emerging market? I know you also named Hungary, Thailand, Turkey, and South Africa as appealing in a recent column.
A. The ones we're overweight on now are Russia and Pakistan. Those are two really bombed-out markets that are pretty attractive. But if you look at our portfolios overall, we still have our largest holdings in China and Brazil.
Q. Isn't Pakistan supposed to be five minutes from a fundamentalist takeover?
A. I don't see that happening. It's a big country, they have very close relations with China, and you're still going to have a pretty vibrant free-market society there.
Q. To the degree that emerging markets are still tied to developed economies, how close are we to the point where this rally won't be sustainable?
A. I don't believe in decoupling, but that doesn't mean emerging markets can't outperform. One of the reasons we're interested in consumer stocks is because we see an incredible increase in consumption in places like China and India. More and more, local consumption is going to replace exports. So, the export dependence won't be as great as in the past.
In terms of the secular trend, there is no question that emerging markets will continue to outperform as they have in the last three years, five years, ten years. The very simple reason is that they're growing faster and they're cheaper. Even now, with all the increase we’ve seen, emerging market valuations—P/E, price-to-book, yield—are lower than the US.
Q. Some Eastern European markets have performed better of late. Does that mean that the credit crisis is over even in emerging markets without the big stashes of foreign reserves?
A. Yes, it's pretty much over. Some of the assets are so cheap now that people are going back in, looking for opportunities. There are two elephants in the room. One is money supply, which is growing at a very rapid pace, and the other is derivatives. Derivatives are not dead, even though they got us into this mess in the first place. And they will not be regulated, because the banks are making too much money. And derivatives, as you know, multiply money. So, the combination of these two things will drive markets.
Q. You mentioned consumer stocks. What industries look attractive right now?
A. Consumer products—anything from toys to garments and appliances—are interesting. And consumer banking—many of these countries are “underbanked,” so there's room for expansion. We also like companies in the commodity area, particularly oil companies. And of course, they have a consumer component in filling stations.
Q. What are the biggest risks for the markets?
A. A trade war—that would be very, very bad. Secondly, any rapid constriction of the flow of money supply.
Q. Isn't the latter inevitable as things improve?
A. Yes, but the question is when? You can be not invested for quite a long time while the market's moving up and the money is being pumped in. Our prediction is that's not going to happen until next year.
Q. Thank you.
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