Q: Do you think the argument for decoupling holds any weight in light of the dramatic falls in the stockmarkets of emerging economies?A: I never subscribed to the decoupling argument. That is simply because in this day and age of fund flows, the way they can move around the world so quickly, not only investors from emerging markets but also from developed countries invest globally. So there isn’t any convincing argument for decoupling.
During the time of high commodity prices, for example, you have some winners and some losers [in emerging markets] so I do not think decoupling will be with us for some time. Everything is coupled together and everything will be impacted.
Of course, in the short term, when you have a big event like you’ve seen in the US, there will be pretty much a global response. However, in the not-too-distant future you’ll see separations and differences between these markets even though they are coupled.
Q: The two biggest geographical exposures in the Templeton Emerging Markets investment trust (Temit) are Brazil and China. With Chinese stocks particularly badly affected by global market shocks this year, how has the trust positioned itself?A: What’s happened is that the biggest weighting in our portfolio is Brazil with about 24% of the fund. China is next with about 13%, and that is of course down substantially from where we have been in the past.
The Brazil weighting has helped because the country has not corrected as much as the Chinese market. It is a country that has large supplies of natural resources, the economy had stabilised and the currency has done rather well, even though it may be slightly overvalued now. The fiscal position of the government has been good, although we’re watching carefully because government spending is up and bureaucracy has grown.
I would say on balance Brazil is in a pretty sweet spot vis-à-vis other emerging markets around the globe.
The portfolio is heavily weighted towards energy stocks but there seems to be a strong banking theme coming through as well.
Q: Do you think the emerging market banks will hold up better than those in developed countries?A: Energy is the largest weighting accounting for around 35% of the portfolio but banks represent around 23%. The thing we like about the banks in emerging markets is, first of all, they are not exposed to the subprime crisis for the most part, and therefore their consumer business is doing very well.
Banks, for example, in Brazil are a core part of the portfolio and banks in Thailand are also important. Unibanco, therefore, in Brazil is particularly good, then in Turkey we have Akbank, which is a strong consumer bank as well, and in Thailand we have Siam Commercial Bank. These banks have minimal exposure to the subprime crisis.
Q: Was there concern over the political risks in Turkey between the military and the ruling AK Party and have they now subsided to some extent?A: The political temperature in Turkey has come down dramatically. The whole headscarf issue has pretty much faded away and the AK Party is still in control, although they are now much more circumspect in trying to introduce Muslim practices in schools and government offices. I think they are going to be more careful in future and will try to avoid creating a political crisis.
The economic reforms, however, continue and the AK Party get grade-A marks for the reforms they’ve instituted. While those continue we are in a good position in Turkey so I’m not concerned.
We’re very much overweight Turkey vis-à-vis peers and the indices and its market has performed fairly well as a lot of other markets have been going down substantially. We probably wouldn’t want to increase our exposure unless Turkey comes down as we’re already at 9% in there so we’ll be looking at other markets.
Q: What does your definition of frontier markets encompass and how does investing in them differ from the more mainstream emerging markets?A: The frontier markets include sub-Saharan Africa, North Africa, the Middle East, Central Asian counties and a number of countries in the Far East including Vietnam and Bangladesh.
Our current portfolio, which we run for Asian investors, has its largest holding in Egypt followed by the United Arab Emirates, Africa, Indonesia, Kuwait, Kenya, Jordan, Estonia, Ukraine, Romania, Zambia and Latvia, so it’s a very varied portfolio. The nice thing about these frontier markets is that they behave quite differently to the other emerging markets. To someone who wants to have less correlation to other markets this offers a good way to do so.
Q: Will the launch of a frontier markets fund to the British market mirror the portfolio offered to Asian investors?A: Yes, it will be looking at the same countries I mentioned. The choices are wide and there are so many countries we can cover. I’m going to be in Africa in a couple of weeks visiting places like Zambia and Botswana and we’re looking at a lot of these countries.
Most of them are relatively small in terms of market capitalisation and the companies are also relatively small and illiquid. In such portfolios we have to be quite diversified and use the different orientations when we are stock picking.
Very much like when we started in the 1970s with the first emerging markets fund trading is constrained, liquidity is not there so we have to pick and chose from a lot of countries and a lot of companies. It pays off because prices have come off so far as even before this crisis these markets were quite attractive and now it is even better.
The new fund is still seeking approval but suffice it to say that we are going to be in that space in the UK, but also in Europe and the US. In Asia the fund is relatively small, around $100m (£57m), but given the growth we’re seeing in these markets $500m will not be excessive. We love starting funds in this kind of environment because we’re really at the lows and you can build up a very good track record.
Q: Do you think that we are nearing the point in the credit crisis where emerging markets have bottomed?A: We have already seen these markets come down a lot. There could be more and nobody really knows whether we’re reaching the bottom but we’re getting pretty close, that’s for sure.
Things have come down so much and are still coming down and my personal feeling is that people are going to wake up to the fact that there are differences between the macroeconomic environment and emerging markets. If you look at budget balances in terms of debt as a percentage of GDP you see emerging markets are much lower than developed economies.
I don’t want to call emerging markets as a haven but given the upcoming inflation that will be hitting us they are going to be in a much safer place.
MARK MOBIUS joined Templeton in 1987 as president and portfolio manager of the Templeton Emerging Markets fund.