Mobius argues Europe should learn from EMs – Fund Forum

Europe should learn some important lessons from the historical development paths of emerging economies, Franklin Templeton’s Mark Mobius, a leading long-time proponent of investing in the developing world has said.

The executive chairman of Templeton Emerging Markets Group (pictured) added it was time bond holders of European bonds – including the ECB – shared more of the pain the Continent’s banking sector is suffering.

Speaking before the Fund Forum event that began in Monaco yesterday, he said: “Everyone has to take a knock, and when I make a bad decision I have to take it on the chin. Why is the ECB buying these bonds at a discount [to par] and then getting paid full value?

“The market knows these things are worth just cents [in the euro], so let’s all take the hit together.”

Mobius said Europe’s economies generally had “become burdened by incredible state bureaucracy and state restrictions” and they could take a leaf out of the book of EMs that faced, and fixed, similar problems in the past.

“You need to get management there to incentivise the profits. You have to free up the economy and allow people to move from one job to another.”

These are exactly some of the reforms supra-national bodies have encouraged EMs to make over the years.

“You have to give the IMF, World Bank and other organisations some credit after struggling with the question, ‘why will these countries not grow?’

“The way to transform an economy is to move from a state-run to a market-run one, and we have seen that in EM country after country.”

Of Europe’s most troubled nation – Greece – Mobius said if the officials decide that Greece must abandon the euro the population will not.

Again, he drew on his experience with emerging, indeed frontier, nations, citing Zimbabwe, whose population abandoned its local tender under hyperinflation and president Robert Mugabe, in favour of the more stable US dollar.

“It was not the government that decided that, it was the people, and I think the same will happen with Greece, you will not be able to force the Greek people to give up the euro.”

Mobius applauded reform already made in Greece, Spain and Portugal, but said more was still needed – and would be achieved over time.

At the level of investment, Mobius’s team has been examining whether, and how to expand its involvement in EMs in a number of significant ways recently.

Derivatives are used in Franklin Templeton’s fixed income products but not in equity products except for depository receipts and warrants. There is always consideration and study of derivatives to see if they could be used to reduce risk but Mobius says there is no “free lunch” and every use of derivatives has its price and the price might reduce long-term returns. Generally, there is great caution regarding any complex derivatives.”We have studied the idea of buying puts and various derivative instruments, but you have to give up some returns (using them) and they are not cheap,” Mobius said.

Mobius concedes: “I do not like complex derivatives and will not use derivatives unless they are fully understood. I realise they can be useful sometimes.”

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