Emerging markets may hit fresh highs ..........

Emerging markets may hit fresh highs
Taken from Todays's ET
TALKING STOCKS, GROWTH & INVESTMENT BETS WITH MARKETS GURU MARK MOBIUS

HE BELIEVES that emerging market valuations are currently around the mid-way mark of their historical 10-year range, and there are enough opportunities in terms of good and solid companies that can survive a downturn. Widely regarded as an emerging markets guru, Mark Mobius, executive chairman, Templeton Asset Management, ranks China and Brazil among his favourite markets, and also has sizeable exposure to Russia, India and Turkey. In an interview with Deeptha Rajkumar, he talks of how frontier markets are the next emerging markets. He says that global interdependency is growing, not shrinking.



Where do you see global equity markets headed in 2010? Which are the ones that you are betting on to outperform the rest?

We think emerging market equities seem likely to hit new highs as we go forward. Emerging economies are forecast to grow approximately four times faster than developed economies — a big difference — which should be reflected in their stock markets. But valuations in emerging markets are still lower than those of Europe and the US because the majority of investors still tend to discount emerging markets, regarding them as too risky. However, this is now changing, as governments around the world, from the US and Europe to China, have substantially increased the level of money supply to prevent deflation. With bank deposit rates, especially in the West, hovering near 1% or lower, most investors are looking for a better return on their investment and are, hence, putting their money to work in the capital markets, fueling a rise in equity prices.
We are finding opportunities in almost all emerging markets. Our ground-up research process locates opportunities in countries where the political or economic outlooks may not, at first appearance, look good. Nevertheless, we generally favour China and Brazil, but also have large positions in Russia, India and Turkey.

What about valuations? Do you think emerging mkts still have room to rise?

Even though valuations are no longer as cheap as they were at the end of 2008, we believe current valuations are around the middle of their historical 10-year range. We continue to find opportunities, and our objective is to find good, solid companies that can survive even in a downturn. Valuations in select markets such as Russia are below the average in emerging markets and as such are particularly appealing, in our view.
India/China have clearly benefited from sustained capital flows in 2009 with the former witnessing inflows of over $17 billion. Would you say this is a sign that emerging markets have finally decoupled from the developed western markets?
Emerging markets will always be coupled with developed western markets and vice versa, since trade and money flows are so much connected globally. However, that does not mean that a decline in western markets will mean a decline in emerging markets. We must look at each on a case-by-case basis. Global interdependency is growing, not shrinking. We must be ready, therefore, to grasp all the opportunities when there is an impact on that interdependency.
What are the sectors you expect to shine in 2010, globally and specific to India?
In terms of sectors, we believe commodity stocks look good because we expect the global demand for commodities to continue its long-term growth. We also favour consumer stocks. With rising per-capita income and strong demand for consumer goods and services in many emerging markets, we believe that the earnings growth outlook for these stocks is positive. Within Indian sectors specifically, we’re seeing opportunities in materials, financials and information technology.

You have been advocating investments in frontier markets. What are the pulls?

Frontier markets are the next emerging markets and include the likes of Kazakhstan, Romania, Nigeria and Vietnam. The key characteristics are the fact that they are overlooked by investors and have offered fewer investment opportunities. Frontier markets, generally, have companies that are oriented towards their respective domestic economies rather than the global economy, so we believe that they have less correlation to emerging markets in general. Most investors have refrained from investing in frontier markets because of the perceived risks. However, I do not believe that the level of risk is necessarily higher as compared to emerging markets. Frontier markets generally share the same political and economic issues as emerging markets, but their valuations may be more attractive as a result of this perception. At the end of the day, it all boils down to picking the right company or stock.

Will commodities outperform equities in 2010? What are the dangers right now in your opinion?

We expect commodity prices to continue to trend upwards, partly because of weakness in the US dollar, and also because we expect the global demand for commodities to outgrow supply over the long term. However, speculation in derivatives markets is likely to exacerbate volatility in the sector, and we recognise that the upward trend in commodities is unlikely to be smooth.

Post the Dubai crisis, which are the other landmines that investors will have to watch out for?

The negative news impacted markets globally, particularly in Asia and Europe, because a number of banks are exposed to Dubai debt and several international construction companies have had large contracts in Dubai. Most markets rebounded quite quickly after it was ascertained that damage to companies outside of the Gulf region would be very limited. As we have said in the past, in any bull market we expect that there will be corrections along the way. In our view, these corrections can be quite healthy, because to us it means that valuations will become more reasonable, presenting buying opportunities. This kind of volatility in emerging markets is what we expect and why it is so important to have a long-term investment horizon. We view these opportunities as a time to continue holding quality investments and to increase our holdings in selected stocks that we believe, over a five-year time frame, will continue to show stable financing.

How do you see interest rate changes in the US impacting the rest in 2010?

If there is a rise in interest rates without a concomitant rise in inflation so that real interest rates become highly positive, then the impact on stock markets around the world could be significant. Nominal interest rates alone would not have an impact except for a temporary psychological one. The key factor is the interplay between interest rates and inflation. High inflation would be good for equity markets provided that those high inflation rates are not accompanied by as high interest rates.