Saturday July 28, 2012
Good investing prospects in emerging markets
By TEE LIN SAY
LONG equities. Long commodities. Asean is the next big story. Europe is going to come out better after this whole mess these are the key messages from emerging market's most influential investor, Dr Mark Mobius.
What does Mobius think is the next big thing in the economy?
A cure for cancer is coming, and anything that can satisfy instant gratification through the production of machines is on the cards, says Mobius.
Now, it's certainly hard to be confident of Europe considering the amount of scepticism people have on the ability of the European Union to solve its financial woes. However, Mobius who got it right by calling a “buy” after the sub-prime crisis in 2009, says the reforms going on in Europe are good developments and will see Europe coming out stronger.
It is no surprise that Mobius has been dubbed the “king of the emerging market funds“. He spends over 200 days a year shuttling from one far-flung emerging market to another in Asia, Eastern Europe, Russia, Africa and Latin America all in the name of finding value companies.
Investing in these “dangerous” and developing countries has brought an appeal to emerging markets investing.
Still sporting his signature shaven head, Mobius is known as an aggressive bottoms-up value manager. The chief aspects in making his investment decisions include transparency in operations, investor protection and good corporate governance.
Mobius, 76, who is celebrating his 25th anniversary this year with the Templeton group, presently oversees some US$45bil over 65 closed and open ended fund in emerging markets. The group now has some US$9bil invested in Asean markets.
Mobius is positive on the growth in emerging markets, saying that these economies grew five times faster than developing markets in the previous year. Those who continue to put their money in safe havens may be eventually losing out, he says.
Emerging markets comprise Asia, Latin America, Africa and emerging Europe. Together, these continents account for some 30% of the market capitalisation of the world.
It is also on this note that Mobius is bullish on commodities and Asean. He sees Asean as the next big story, fuelled in part by the emergence of Myanmar and Vietnam, its strategic location and its hard-working population of half a billion people. The rise of the Asian consumer will see higher spending on cars, food, consumer products, services and more power. Mobius sees demand for power, such as electricity, rising like a rocket.
With raw materials such as palm oil, sugar and corn being used for renewable energy purposes, Mobius sees commodities heading north, although not on a straight line.
Mobius was famously opposed to Malaysia during the Asian financial crisis, when the Government imposed capital controls in 1998. Mobius had then labelled Malaysia a “non-investible market”.
During that period, Templeton's funds were blocked from flowing out of the country for about a year due to the capital controls. That made Templeton uncomfortable as it was running open ended funds.
Today, though, that view is in the exact opposite direction.
“Many Western investors would likely have little trouble naming this year's biggest initial public offering (IPO) in the United States, but they probably don't know that two of the top three global IPOs this year have been in a small nation probably better known as a holiday destination than an investment one. That country is Malaysia, where an interesting story has been unfolding in the IPO market. This year's IPO calendar has included two companies which both received strong investment commitments that launched them into the top three of the world's largest new offerings of this year,” Mobius told the media recently in Kuala Lumpur.
Mobius said that Malaysia had stood out to many investors as an attractive investment destination. In contrast to many developed nations in the throes of debt crises, Malaysia is running current account surpluses with reserves reaching over US$130bil.
“While the total government (public) debt-to-GDP ratio has risen this past year to above 50%, a trend that concerns us its total external debt-to-GDP ratio (that owed to foreign creditors) stands near 30%, reasonable in our view. (The United States external debt-to-GDP is more than 90%, for example).
“Malaysia's high domestic savings rate is an asset, and we view the national balance sheet as strong overall. While not without challenges, Malaysia has generally been reaping the benefits of financial prudence in the wake of the 1998 Asian financial crisis and there is reason to believe growth could continue to rebound longer term,” said Mobius.
Mobius was recently in Kuala Lumpur to visit some of the companies that Templeton has invested in. The Titan of Templeton shared some of his thoughts with StarBizWeek.
SBW: Do you like Malaysia?
Mobius: I love Malaysia. I like the rambutans. Malaysia is growing! (laughs) The government is making the right moves in terms of liberalisation. And Malaysia is a part of Asean. And Asean is going to be the next hot thing. It's going to be the next story globally.
I say this because you've got Myanmar which is a brand new country with resources, you've got Vietnam that is only just beginning to take off and you've got Indonesia, Malaysia and Singapore. All these are hotspots. They are very exciting places. This group will begin to act as a balance to China. As you know, China is becoming more and more powerful, so it will be necessary to have a balance to China's power. Asean is going to be very exciting.
Why will it be exciting?
Number one, because of its resources. Number two, because of its strategic location between the oil markets and the Middle East and the rest of Asia. Three, the population. You've got half a billion people. Number four, tremendous agricultural and mineral resources. Number five, talented hardworking people. So you've got a tremendous growth potential. And the trade among the Asean group is growing at a very rapid pace.
We like commodities and we like consumers. Consumers as in retailing, clothing, food, supermarkets, you name it. Anything to do with consumers, because consumers in South-East Asia are getting richer. They are buying more fashionable things. For example, I like Giordano. I like Giordano because it's cheap and it fits me very nicely. I was in Thailand yesterday in a Giordano shop. They had medium size. I put it on, and I got stuck! Their design is incredible, and so is their price. But this is just an example. I'm not saying I'm buying Giordano or anything. I'm just saying that I'm using it as an example of what can be done in Asia in terms of value design and marketing. That's the kind of thing we are looking for in Malaysia. Companies like that, that can deliver products at a good price, nice value and with good distribution.
You can see a lot of Malaysian brands coming up in the market. And being more international and regional.
You mean brands like CIMB?
Yeah. A good example of that kind of branding is Crabtree and Evelyn, the one sold by Kuala Lumpur Kepong Bhd. It's a success in terms of marketing. Now, of course, it didn't make money, but it's a good example of what a Malaysian company can do if it wants to, in building a brand globally. That's because you see Crabtree and Evelyn in America, Europe and everywhere. So it's a success story and shows you what can be done. (KL Kepong disposed of the English retailing brand earlier this year)
What makes Malaysia special?
To give you an example, rubber is a big source here in Malaysia. We like rubber glove manufacturing because now that they have increased their research and development, they are very sophisticated and they are using lots of raw materials. So the value add is very good. That sector is good.
Plantations and palm oil. Palm oil prices over the long term will tend to increase.
There was a time when you didn't really like Malaysia?
As the government policies change, we like it. If you remember what happened during the Asian financial crisis. (Malaysia imposed capital controls) That was very bad. With us, even though we are long term, and we probably would not have sold at that time, the fact that we couldn't get out was very dangerous. Because we are running open ended funds. So, if a government says, hey you can't get out, we're stuck and we're in trouble. So then it's difficult for us to explain to our investors why we're invested in Malaysia, because we won't be able to get out. That was a problem. We understand why the government did that.
What are some of the things in Malaysia that you would like to see improve?
Number one, further liberalisation. Number two, closer ties with neighbours Singapore, Indonesia, Thailand, the Philippines. I think this whole border problem in Thailand need to be resolved. It cannot continue. So that would be really positive.
The whole neighbourhood should try to increase trade and cultural exchange and try to work out any conflicts. That would be very beneficial. And, of course, it is coming, especially with the Asean trade liberalisation. And we'd like to see more privatisation of state-owned enterprises.
The ranking of Malaysia in our portfolio depends on our funds. But Malaysia is growing. In our Global Fund, it is about 1%, but we're at 40 countries. So 1% is not bad. We've got US$45bil invested in our Global Fund.
We not only buy equity, we also buy Malaysian bonds.
You are positive on plantations?
Yes, we like plantations. Because demand for palm oil is growing at a rapid pace globally. More and more people are eating instant noodles and, therefore, you need more palm oil! These raw materials are going to be in demand going forward.
What about using raw materials for renewable energies?
I'm a little worried about that. Because if you look at corn prices for example, well, it is not only because of the draught in the US, but it is also because they are using it for ethanol, and it's taking it away from the food supply. What are the alternatives? The alternative is either to introduce genetically modified (GEM) seeds, use more fertilizer or open up more fields. You will have an environmental impact if you open up more fields.
One of the reasons we are buying more fertiliser companies in Europe and Russia is because demand for fertiliser is bound to be increasing as we go forward. In Europe, they are banning all GEM seeds. At least about 10% of corn crop is used for ethanol. In Brazil, sugar is being used for ethanol. So there is a real challenge going forward. In China, there are more people switching from soybeans to protein from meat. The conversion is 1 to 10. You need 10 times more soybean than you need 1 unit of meat. All of this is having a big impact moving forward. I believe this will continue to drive up commodity prices.
What about property?
I like property on a very selective basis. We do have some property companies, but we only like those that have a sustainable growth. They are not just dependent on sales but also on income. So, it would be a company that has shopping malls and office buildings that can generate rental income and housing which can also be sold.
Europe and The World
With the current ongoing turmoil in Europe, what would your investment strategy be?
Right now, we are looking at Europe as a recovery play. We think Europe is on the right path, they are doing the right things to reform. They have a long way to go because government spending in Europe is much too big. They've got to reduce the role of the government in the economy. That's the reason why, when we say the reforms of cutting up on spending, and many people say, oh it's terrible, the economy is going to the dumps. No, the economy will recover faster if you cut government spending.
Because it gives room to the private sector to come up. We think that Europe is doing the right thing, and with the discipline that is being imposed, actually they will recover very nicely.
So basically you are saying that we don't have to worry about Europe very much?
No. The problem is, a lot of the press is controlled by the British. And the British shun the euro. They don't want to give up this relic of the British pound. They should really be in the euro. They are resisting that, so that's why you hear a lot of bad news. That Greece is going to leave the euro, blah, blah, blah.
The reality is that none of the Greeks want to leave the euro. Euro is a very good currency. And the question is why is the euro at 1.20 to the US dollar? Why doesn't it go down to 0.8? Whats happening? There's something about the euro.
What are some of the things you want to see changed in Europe before you become more positive?
Well, of course, we want to see more ongoing reforms in terms of labour flexibility. By the way, this is very important for Malaysia as well. It has to be more flexible in terms of company to hire and fire with reasonable grounds, of course. But there should not be restrictions to do that. That's the reason why I said in Italy, once you have over 20 people, then you've got to have a labour negotiator, you've got to have this and that. So, they don't want to hire once they reach 19 people!
Because all the burden of government requirements come in. All these kinds of restrictions and problems, which Greece has, by the way, have to be wiped out. You have to get this out. Because what creates employment? The small enterprises. You've got to help these small enterprises by reducing bureaucracy. Reducing red tape.
Making the government more efficient. There has to be a measure of government efficiency. You've got to make it much easier to get a licence. Here, I mean, how long does it take to get in line and get a licence in Malaysia? You gotta make it faster.
In Greece, you can't even get a taxi licence! They have restrictions on this and that. On what you can and cannot do. All of these things are not good for the economy.
How serious are the problems in the European banking system? Are you particularly worried about any European bank? Spain for example?
If Europe wanted to, it could do what the United States did. Just buy up all the bad banks. But the Europeans say no. We are not going to do that, because we want to see some discipline. We want you to take the pain.
The European Central Bank just said that senior debt holders had to take the pain too. Before, they are exempted, there has to be shared pain. Why? Because then, they will have no more of this nonsense in the future. They will realise that if you invest in the bank, you take a risk, and you have to watch the bank carefully. So the moral hazard, they are trying to reduce. I think it's a very positive development for the Europeans.
So you are happy with the developments in Europe, and under those circumstances, you would be long rather than short?
What about China?
China is now the second largest economy in the world. You can't expect to see a huge economy like that to grow at double digit. It's just too big. If the US goes at 3%, you say oohh wow! Its incredible. The same thing with China. So China growing at 7.5% is incredible growth.
What is it that you like in China?
Again, we like consumer products, And anything to do with power and energy.
When you say power and energy, do you mean renewables?
No. There is no money in renewables. You see the big conflict with the solar power? Why? Europeans were ok before because the government is giving them all this money. Now when the government says no more money, it's gone down.
I'm not saying renewables don't have a chance. But if renewables have to have a chance, it will be when oil goes to US$150 a barrel. Then solar and wind become more competitive. But at these prices, it's very difficult.
But what we like is diversified oil companies. Because demand for power globally is going up like a rocket. Why? Because when you see the number for automobiles ... they use either diesel or gasoline or lubricated oil. House need electricity. And they need more electricity. Why? Because they own the Internet, watching TV, home appliance, every cellphone needs electricity. I mean, I don't know what I would do if I don't have electricity. I can't charge my cellphone anymore. That would be a problem.
This is a global issue. I was in Nigeria recently and I got stuck in the elevator. No power. Unreliable power with no central system. Everyone there has to have a generator.
The next big thing
What do you think is the next big thing? What will be the norm 5-10 years down the road?
I think it's got to do a lot with personal consumption. And there's going to be more instant gratification, in the sense that if you want something, it will be more personalised and it will be delivered faster. Communications and transportation will be increased to such an extent that if you want something, you get it the next day or the same day and it will be personalised.
For example, say a dress. You want a red dress, you want it in your size, you want a little trimming here and you want a little change there, You will request for it, and it will be done. By machines. It will be produced by printing. The printing system will be so improved. These companies which are doing the printing of the products are going to be the next big thing.
And the next big thing is also the pharmaceuticals. The gene manipulation, make you look young, feel young, avoid certain sicknesses. For example if you have a gene which makes you prone to cancer, they can change that gene.
You think they are discovering that soon?
Yes. It's happening already. There have been big improvements in cancer. Let me give you an example. One of our analyst in China got blood cancer. We bought medicine for him costing US$30,000. It's expensive, but he's cured now. We got it from the United States. There are now cures. They used to have chemotherapy and radiotherapy that ate a lot of other cells, but now they can do it very precisely with very precise medicine.
So you think there is a cure for cancer?
Yes, a cure for cancer. There are a number of companies who are doing it. These are the kinds of things that you see coming down the road, and will be a tremendous boon to mankind. I am hoping they will move faster as I get older. To reverse the aging process!
On trading and style of investing
Who's style of investing do you most resemble among the investing greats?
Well, it's John Templeton.
Your investment idol?
I would say John Templeton. Or Warren Buffett is probably the closest to our mentality.
Do you keep your money in your own funds?
Yes. All my equity money is my own funds. Everything. I don't buy any other funds or individual stocks. Too complicated for us because we have to report.
What is the most prominent fallacy in the public's perception about markets?
Ya, the big myth is that you can lose a lot of money in the markets and you have to be careful because it's run by a bunch of crooks. For the most part, companies listed on the market are run by good people who are trying their best.
Of course, there are instances of crooks and people who cheat, but most of them are good.
More volatile market seen for H2