Emerging, frontier markets bring opportunities amidst volatility, says Mobius

Against rampant volatility in established markets, Franklin Templeton’s Mark Mobius believes investors will gain from greater performance and falling macroeconomic risks in emerging and frontier market equities.

More than a decade of outperformance of emerging markets will continue, say Franklin Templeton’s Mark Mobius (pictured) and colleagues David Haglund, vice-president and executive director of Franklin Templeton’s asset management division based in Dubai; and Vikras Chiranewal, vice-president and joint director in Mumbai.

Based on MSCI’s Emerging Markets index versus its US and World indices, emerging markets outperformed developed markets on nine occasions between 2001 to 2011.

The two years of underperformance are explained by the shock of global banking crisis in 2008, and the subsequent crisis in sovereign debt markets since last year.

Better long-term performance is increasingly reflected by a shift in investor activity away from the developed world and toward the emerging world.

Emerging markets’ share of IPOs globally jumped from less than 10% of new share issues in 2001 to more than 40% in 2010. The deal value of emerging markets IPOs shot up from almost nothing in 1987 to more than $450bn in 2010.

Risks tailing off

Risks traditionally associated with emerging markets investment are tailing off with greater liquidity, says Mobius. Emerging markets made up about 8% of total world stock market capitalisation from 1998 to 2001. But by the end of 2011, the share of emerging market stocks within total world stocks was 34%, having risen consistently since the early 2000s and only dropped off in mid 2007 to 2008.

Despite that growth, most retail and institutional investors are heavily underweight in emerging markets exposure, the managers say. Average exposure for pension funds to emerging market equity is between 3% and 8%, according to Pensions and Investments 2010 data. Mobius thinks the caution is misplaced.

Investor concern centres on how to get out of markets when performance and prices fall. But an increasing accumulation of foreign reserves in many emerging market economies means it is easier to pull a client out, says Mobius. Emerging markets hold $3000bn more in reserves than developed markets, according to the EIU and the IMF.

 

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