Templeton Emerging Markets Group: Emerging markets are not in recession

Emerging markets still offer good opportunities for investors and are not in recession, according to executive chairman of Templeton Emerging Markets Group Mark Mobius.

Mobius was speaking at the manager’s roundtable on Asian equities and the future of BRIC markets, held in London.

Chetan Sehgal, Carlos Von Hardenberg and Allan Lam, portfolio managers with Templeton Emerging Markets Group based in India, Turkey and Hong Kong respectively, joined the panel discussion aimed at checking the pulse of global and emerging markets as well as addressing issues such as volatility, investment strategies, frontier markets and corporate governance.

“Emerging markets are not dead,” said Mobius, “and I can list at least three factors that demonstrate it. First of all, emerging markets growth is 5% in real terms; second, there are more foreign exchange reserves and third, debt levels are still quite low.”

As Mobius also pointed out, several emerging and frontier markets have seen strong returns in recent months and there are several other emerging market performers where positive macroeconomic developments have attracted strong investment flows.

“Of course, we’ve seen some disappointment too,” Mobius admitted.

“Some larger emerging markets like South Africa, South Korea, Russia, China and Brazil have lost ground year-to-date through April. In China, the authorities responded to rising property prices with measures to tighten monetary policy and restrict property purchase.”

However, Mobius pointed out, many of the issues that held back the performance of major emerging markets will have little long-term impact overall.

Small-cap stocks and frontier markets seem to offer the best opportunity for investors in a scenario where volatility and risk remain high.

Chetan Sehgal, said small-cap stocks have done well recently and offer investors the opportunity to invest in consumer sectors.

“Another advantage of small-cap stock is that they normally come from local rather than global companies and are mainly driven by private enterprises,” Sehgal said.

Addressing the issue of frontier markets, Carlos Von Hardenberg, highlighted that those markets guarantee safe investments in under-researched areas.

“Emerging markets currently account for 35% of world market capitalisation, while frontier markets make up only 3% of it. We started to invest in frontier markets four years ago when nobody was interested in them, but now it’s a market in expansion,” Von Hardenberg said.

As Von Hardenberg also pointed out, frontier markets, where the total AUM across the Templeton Frontier Markets strategy is currently close to $4bn, are carrying out significant reforms proving that these markets are maturing.

“Frontier markets countries are producing more IPOs and regulatory forms are changing too. We’re seeing a dramatic change in appetite from portfolio investments, several investors are setting up productions plans in Africa, for instance,” he said.

According to Von Hardenberg, China is one of the biggest investors in frontier markets, with a strong presence in Vietnam, Tanzania, Uganda and Angola.

“Moreover,” he said, “we expect GDP growth to be between 6-10% this year in these markets.”

Allan Lam, said that the Asian market has also grown in April and that Templeton is particularly interested in investing in Thailand, especially in the automobile and motorcycle sectors, which offers “high profit margin and high return on equity.”

“Thailand remains a very interesting market for us,” said Mobius. “We will keep our position there, as we do believe the economy will keep expanding and that valuation will continue to be a drag.”

Commenting on the current political turmoil in Turkey, Von Hardenberg said it is unlikely that it will significantly affect the country’s economic and financial development.

“Turkish  stock markets grew last year by 54% and it’s still outperforming today with 5% growth. The government has privatised public assets; they are building a third bridge on the Bosporus , as well as the biggest airport in the world and GDP has tripled since 2002. A very large part of the population supports the government for its recent achievements.

“Banks are much more stable than in the rest of the world, are more capitalised, and the market there is still not expensive. It is wrong to assume that the current turmoil will derail the economy.”

Touching on the issue of corporate governance, Mobius said it is in a very bad state all across the world and has welcomed the reforms that are currently underway in Eastern Europe to strengthen it.

“Brussels has a good influence on Eastern Europe when it comes to improving corporate governance. Eastern European governments will complain about new legislations going in that direction, but at the end of the day they will have to apply the standards set by the EU,” Mobius said.

Finally, Mobius said that Templeton Emerging Markets Group remains aware of risks to all markets, including emerging markets, arising from the fragility of global growth, indebtedness, and a number of geopolitical risks, notably in Korea, the South China Sea and the Middle East.

“However, while we take account of macroeconomic considerations as part of our investment process, our central aim is to build portfolios from those stocks our research leads us to believe are most underpriced relative to their long-term potential,” he concluded.

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