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Mark Mobius « numerous emerging markets companies are still undervalued »

According to Mark Mobius, one of the most recognized expert in emerging markets, many emerging economies are forecast to grow by considerably more than developed markets, even taking the current economic climate into account

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What is your opinion about the current and the future economic situation in emerging countries, especially for BRIC?
Emerging and developing countries such as China, India and Brazil are forecast to enjoy a significantly higher average growth of 6.3%, and they are already producing 47% of the world’s goods and services by market value.

It is important to look at each country individually. For example, there was no recession in some parts of the world such as Brazil and China, where economic growth has continued at a high pace and standards of living have increased.

We expect emerging markets and especially BRIC markets to continue a long-term secular bull phase, reflecting the economic growth in these countries, although markets will probably experience corrections along the way. The economic recovery in BRIC markets is sustainable in view of their strong fundamentals. In addition to robust reports of economic growth and other macro economic data, financial and fiscal indicators also remain positive.

How do you explain that the financial crisis has so little economic impact for BRIC in terms of growth and debt?
In the mid-1990s, some emerging markets substantially relied on foreign financing, making these countries more vulnerable to shifts in foreign expectations and perceptions. Consequently, they experienced serious financial crises, such as in Asia in the late 1990s and in Latin America in the early 2000s.
As a consequence, during the early part of this century, a policy shift took place in some emerging markets to avoid this vulnerability. They tried to reduce both their global level of external indebtedness and their level of short-term debt, empowered by current account surpluses in several countries. In parallel, they increased their national saving rates, most notably in Latin America, which saw its average domestic savings rate increase from 17% in 2001 to 22% by the end of 2008.
In Asia, a consensus emerged that a sound banking system and a liquid domestic capital market were necessary to allow participation in the international financial system without excessive exposure to large, unanticipated withdrawals and speculative attacks.

As a result, some emerging markets have now become more stable thanks to the implementation of long-overdue structural changes following their “trial by fire” through these major financial crises. You could even argue that emerging markets are today fiscally healthier than developed markets in terms of foreign reserves, debt-to-GDP ratios and risk perceptions.

Another reason is the low correlation between emerging markets with developed markets, but correlation is also low between different emerging markets, and between different asset classes within emerging markets.

What are the main reasons for you to invest in EM right now?
Emerging markets offer attractive investment opportunities because of the (1) relatively higher GDP growth in emerging markets, (2) accumulation of foreign exchange reserves which puts emerging economies in a much stronger position to weather external shocks, (3) relatively lower debt levels of emerging market countries, (4) growing investor confidence in emerging markets (5) strong fund inflows into emerging markets, (6) search for higher returns in the face of low bank interest rates and most importantly, (7) undemanding valuations.
Moreover, another reason in favour of emerging markets is again their low correlation with developed markets.

In terms of valuation, is it a good timing to invest in EM?
We continue to be positive in our outlook for emerging markets for a number of reasons: their relatively high pace of economic growth, high levels of foreign exchange reserves, relatively low debt levels, relatively higher returns compared to low bank interest rates, and, most importantly, their undemanding valuations. Despite their rapid growth, numerous emerging markets companies are still undervalued when compared to their peers in developed markets. Moreover, as a result of the growth in stock markets, liquidity has also improved significantly. Yes stock prices are higher than they were a few years back, but so are earnings. So we continue to find undervalued stocks in most emerging markets.

Do you think that there is a property bubble in China?
The government is determined to contain any possible bubble scenario. They ahve implemented measures aimed at cooling the property market. In Beijing, these included restricting families from buying more than one residential property.

China owns more than 500B in US government bonds, what could be the impact for Chinese economy in case of bond krach?
China has one of the world’s largest stores of foreign reserves, at more than US$2 trillion, putting the country in a much stronger position to weather external shocks, while its debt-to-GDP ratios is relatively low compared to developed countries. While China obviously cannot operate independent of developed markets in terms of trade and capital flows, it is evident that as time goes by, it is becoming somewhat less dependent on trade with the U.S. and Europe. China itself is now the major export destination for many Asian countries, while domestic growth is stimulating a rapid rise in internal demand, further boosted by government subsidies. Government expenditure in areas such as infrastructure and private domestic consumption has at least partially offset the moderation in growth resulting from slowing exports, and the services sector has also been gaining in importance.

What is the relationship between EM and commodity markets: could you please give us an example for illustration?
As an example, when agricultural commodities have been soaring, Chile has beneficiated from the boom in agricultural commodities since they are a major producer of fruit juices, fruit juices concentrate as well as vegetables, flowers and other commodities. Brazil also is a major agricultural producer and exporter of poultry and other food products.

Do you think that BRIC would have a higher GDP per capita than the US and Europe in the next 25 years?
Many emerging economies are forecast to grow by considerably more than developed markets, even taking the current economic climate into account, and emerging markets actually look healthier than some developed markets.
Today, those countries that are classed as emerging and frontier markets (ie countries at an earlier stage of economic development, with smaller financial markets and low liquidity) cover 77% of the world land mass. They also have 82% of world population, and hold no less than 66% of foreign reserves. They account for 13% of world stock market capitalization, 8.3% of the world debt markets and, as already mentioned, 47% of world GDP.

Over the next two or three decades, we could expect to see more of today’s emerging markets among the top 10 richest countries in the world, including many fast-growing countries such as China and India, which could continue to power ahead.

What is your opinion about the current economic situation in the US and Europe?
On a global basis, we are still at an early recovery stage. We believe a double-dip scenario is not likely right now because of the sustained growth in money supply. The U.S. government is already poised to embark on “Quantitative Easing 2” at the first signs of a faltering economy.

Do you believe in a V recovery in developed countries?
We think the world is still at an early stage of economic recovery. However, all countries do not move in the same direction at the same pace, so it is important to look at each country individually. For example, there was no recession in China, where economic growth has continued.

RF September 2010

Article also available in : English EN | français FR



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