A recent Q&A with Mark Mobius, Templeton Asset Management’s emerging markets guru, follows below, courtesy of the company’s Market Views newsletter.
What are the pros and cons of investing directly in emerging market equities and bonds as opposed to companies based in developed markets with emerging markets operations?
By directly investing in emerging market equities you obtain full exposure to emerging markets while with investing in developed market companies with emerging market operations, you don’t get that full exposure and you also get slow moving markets with lower growth potential mixed in. One advantage of some developed market companies is that they could have a global coverage thus giving the investor a more diversified coverage. Of course, there are also some emerging market companies that have that kind of coverage as well.
How probable is further tightening of monetary policy in China within the near future - and what would that step look like?
It is highly probable that there will be tightening of monetary policy in specific areas and not as a general policy. The Chinese have made it clear that they want to ensure that economic growth continues at a high pace and that means that they would want to keep liquidity and money supply at a high level with the proviso that if inflation increases then they would restrict lending and money supply to some degree. They will try their best to avoid taking any measures which would jeopardize the country’s growth and therefore any tightening will be specific and targeted to inflation in certain areas.
What is your outlook for Africa?
We believe that the outlook for Africa is very good for three main reasons: (1) abundant natural resources, (2) a young population, and (3) heightened interest from rich emerging market countries. Africa has some of the world’s greatest deposits of natural resources, and only a fraction of those resources have been tapped. In addition, it has a young and growing population who could improve their education and skills to become a major asset to expanded manufacturing and mining enterprises. These factors have stimulated the interest of countries like China and India, who require more natural resources for their growing economies, as well as countries like Russia and Brazil, who look to expand their enterprises into global operations. Countries around the world are showing growing interest in manufacturing within Africa for the African market, particularly emerging countries that have the capabilities to operate in challenging political and economic environments.
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Africa is an interesting region. In South Africa, efforts by local companies to expand their international market share, as well as the presence of capable management teams, can assure investors of finding bargains here. Higher global demand for commodities, a recovery in domestic demand and the preparations for and hosting of the 2010 World Cup should further support economic growth this year.
In addition to South Africa, we have been taking a look at the lesser-known frontier markets in Africa, some of which are very large countries, such as Nigeria. Regional markets such as Egypt and Kenya are also beginning to look attractive, and we are seeing the growth of new markets in this region. Libya, for example, already has a stock market and is encouraging the privatization of state-owned enterprises - a development being repeated in a number of African countries.
Some commentators are saying that frontier markets represent some of the best contrarian investments at the moment - do you agree with this and why?
Yes, that is certainly the case. For example, many people would never invest in Nigeria or even might not even visit the country for fear of confronting violence but actually there are excellent investment opportunities. So there are opportunities simply because those opportunities are not attractive to other investors since they are not familiar with the possibilities.
Qatar, Kazakhstan and Nigeria are among those countries being cited as ones to watch this year - why do you think this is?
Those are some countries that are citied as being watched but we should add a number of others such as Vietnam, Romania and a number of others. Qatar, Kazakhstan and Nigeria are all being watched because of their natural resources: Qatar - gas, Kazakhstan - oil, and Nigeria - oil.
Are there any particular sectors within frontier markets that you think will perform better than others?
We employ a bottom-up, value oriented, long-term approach. As we look for investments, we focus on specific companies rather than sectors or regions. However, during our analysis, we also consider the company’s position in its sector, the economic framework and the political environment.
Our focus continues to be on two key themes: consumers and commodities. With rising per capita income and strong demand for consumer goods, the earnings growth outlook for these stocks is positive. Commodity stocks also look good because we believe commodity prices will trend upwards, partly because of weakness in the U.S. dollar, and also because we expect the global demand for commodities to outgrow supply over the long term.
This article is a guest contribution from Barry Ritholtz, or the BigPicture.
Yesterday’s WSJ had an article about Canada’s Housing market. (Housing Rebound in Canada Spurs Talk of a New Bubble). The article noted that “Average home prices in Canada have risen 23% from their trough in January 2009. Home-sales volumes are up 70% over the same period . . . Canada’s housing recovery has been so rapid that some here are worrying about a bubble.”
But to call it a rebound misses the point. As the Cleveland Fed pointed out, Canada’s housing market never went bust — there was a sales dip, but nothing like the US. And prices have continued to go higher to the point where the Journal is now discussing them in terms of bubbliciousness.
Why is that?
There are a variety of reasons why Canada’s market held up better than that in the US, but I boil it down to the big four:
1) Lending Standards: Were increasingly non-existent in the US from 2001-07. On the other hand, Canada never had the non-bank lenders that abdicated these standards en masse. There was no “Lend-to-Securitize” business model in Canada.
2) Mortgage Insurance: Mortgage with less than 20% down payment are considered a high LTV ratio (This was 25% previously). Mortgage insurance is required. Over 80% of Canada’s homes have what was commonly known as PMI in the US.
3) Full Recourse Mortgages — you can walk away from the house, but not the mortgage debt. Makes quite a difference in the way borrowers behave.
4) Single Regulator, Lack of Regulatory Capture: The hodge podge of Federal and State regulators encourages forum shopping; it also masks much of the massive lobbying effort by US banks and investment houses. Lobbying dollars don’t seem to be nearly as pernicous or corrupting Noprth of the border.
The Cleveland Fed also noted that subprime mortgages accounted for a fifth of all US mortgages originated between 2004–2006. In Canada, the subprime market share was roughly 5% percent in 2006—compared to 22% percent in the U.S. And the Canadian never expanded significantly into the wackier exotic mortgage products — IOs, Neg Ams, Piggy Backs, etc. (interest-only and negative-amortizations grew rapidly in the U.S. from 2003 to 2006).
From Art Cashin’s Market Commentary, as distributed by UBS Financial Services, February 4
On this day (+2) in 1858, that august deliberative body, the U.S. House of Representatives was calmly discussing a matter of import to the nation. Well….maybe “calmly discussing” misses the point. The House was in mid-debate/mid-filibuster on the topic of admitting Kansas to statehood….and whether such admission should be as a Free State or slave state.
The debate had been going since the prior day and as it moved into the wee small hours of February 6th the tension, partisanship and weariness began to show. Since night-time in February, in Washington, in the Capitol building, in the 1850’s tended not to be too warm, several members of Congress were said to have sipped (or gulped) some alcoholic beverages….just to stave off the chill.
Rep. Keitt of S.C. made a rather uncomplimentary remark about Rep. Galusha Grow of PA. (who had the floor at the time). Rep. Grow responded with an equally unkind assessment of Keitt. Keitt went for Grow’s neck, but was knocked to the ground. Soon most of the House was wrestling, spitting, kicking and punching their worthy and distinguished colleagues. Spittoons and inkwells flew through the air. The Speaker gaveled for order with no success. The Sergeant at Arms beat members with his staff (in a non-partisan way, of course).
Rep. Grow was being pummeled by Barksdale of Mississippi when Washburn of Wisconsin rushed to Grow’s defense. Washburn’s intention was to grab Barksdale by the hair with his left hand and knock him out with a right uppercut. But when he grabbed Barksdale’s hair, it came off in his hand. Shocked, Washburn screamed. The rioting representatives looked up and saw a suddenly bald Barksdale…..and Washburn waving his wig. “My God, he’s been scalped!” shouted someone and the riot broke up in riotous laughter.
To mark the day, suggest to the bipartisan leadership that they appoint someone from the Hair Club as doorkeeper.
The tape was neither hairy nor scary Wednesday. It was idle and indifferent.
Buck Bounces A Bit So Stocks Buckle A Bit – Duh! Stocks soften. Gold softens. Oil softens. Most commodities softened. And, so the dollar must have – you guessed it Sherlock, the buck bounced. Pundits pointed to things like Pfizer earnings or to some of the data missing the estimates. But down on the playing field, it was clear that it was all about the buck and nothing more.
We wrote yesterday that the easy part of the reflex rally was over. Sure enough the market obliged by producing an inconclusive session. The fog has set in, and, despite Sandburg, it didn’t come in on little cat’s feet, it came in on lower volume. Just a boring and frustrating day. Yawn.
How Dry I Am (And Maybe A Little Hungry Too) – Last year, I suggested that 2010 might be the year of food shortages around the globe. That may be why I was struck by a piece put out by the always sharp-eyed, Andy Lees, of UBS in London. Andy reviewed a treatise on global water put out by the World Economic Forum (pronounced “Davos”). The figures Andy pulled from the report are downright stunning. Here’s how Andy began:
Water – The global growth inhibitor!!!
http://www.weforum.org/pdf/water/WaterInitiativeFutureWaterNeeds.pdf, written by the World Economic Forum, and entitled “The Bubble is Close to Bursting”, gives some pretty hard facts about water security that mean present day assumptions about economic trends seem unlikely to bear any reality to what transpires. It does talk about long term affects from global warming, but given that is all theory, I want to concentrate on just the hard facts as we know them.
70% of global freshwater withdrawals are used for agriculture – (up to 90% in developing economies), but it is thought that 50% of that water is wasted against the most efficient irrigation systems. A typical meat eater’s diet requires twice the water input than a vegetarian diet of similar nutritional value – (meat itself requires 10 times the water per calorie than plants), so a simple switch to meat would wipe out all the possible efficiency gains from drip irrigation etc, before accounting for the 2bn – 3bn (30% - 45%) growth in population numbers expected over the next 25 – 40 years. There simply isn’t the water for the world at large to go on the Atkins diet. “With business as usual water use practices, by 2025, water scarcity could affect annual global crop yield to the equivalent of losing the entire grain crops of India and the US combined (30% of global cereal consumption”.
Andy then went on to point out that if we tried to increase energy supplies by 5% using something like Ethanol, it would
double the global agricultural demand for water. Andy then goes on to compare water usage to GDP.
Not only does China use 10 times the energy per unit of GDP than does Japan, but it uses 5 times the water per unit of GDP than the world on average, and 8 times the water per unit of GDP than the US. There simply are not the resources available to lift China’s GDP per capita to the levels of the West. Of China’s 669 cities, 60% suffer water shortages and half of them lack wastewater treatment. Treating sewage – (pumping) – requires large amounts of energy that China cannot afford. The global market for water and sanitation infrastructure is estimated to grow from USD400bn a year today. By 2015 an average annual investment of USD772bn will be required for water and wastewater services around the world.
We’ll have more on China in a minute but the WEF paper on water may well be worth a weekend read. Not only will water shortages become a drag on the global economy, it may be the cause of conflict both among nations and within them. It will also be a great investment opportunity.
Does Jim Chanos Read Stratfor? – Jim Chanos, the noted short seller, has been very public recently with his bearish outlook on China. Yesterday he got an unexpected assist from the folks over at Stratfor. Here’s what they wrote in a piece titled “China’s Unsustainable Economic Model”.
CHINA RELEASED THE BREAKDOWN of its economic growth statistics on Tuesday. Bottom line: falling exports weighed heavily on growth and nearly canceled out the GDP gains of domestic consumption. Investment — mostly in infrastructure and public services — comprised over 90 percent of growth.
These results capture the essence of everything STRATFOR has said about the Chinese economy over the past year. Like many countries affected by the recent economic crisis, China resorted to government stimulus to make up for the sudden loss in private demand. But unlike other states that use such measures in emergencies, China’s growth has always been fueled by massive infusions of government funds and credit from a statecontrolled banking system. The endless stream of loans nourishes the businesses that employ China’s enormous population. Exports play an important role because they bring in new money to be redistributed by the banks as directed by the government.
Of course, the redistribution process creates divisions between the haves and the have-nots, but such divisions can be elided when times are good. It is only when exports slump that it becomes evident that China’s consumers are too poor to buy all the goods the country produces, and the weight of maintaining growth falls squarely upon the financial system. This setup is particularly problematic because a centrally controlled financial system that endlessly transfers wealth from efficient internationally-linked sectors to inefficient state sectors will eventually collapse under the weight of bad loans.
As you would expect from Stratfor, they go on to analyze the impact of the economics on both China’s internal politics and on China’s geo-political posture. They may have far deeper problems than tapping on the lending brake to deflate a housing bubble. Stay tuned.
Cocktail Napkin Charting – Once again the S&P struggled when it hit the resistance band at 1102/1105. Minutes before 10:00, the S&P hit its intra-day high of 1102.72. Within seconds, it began to head lower. By noon it looked ready to challenge the support band at 1087/1092. Instead it stopped at 1093 and then churned choppily sideways for the balance of the day.
As noted yesterday morning and, again, above, the “easy” part of the reflex rally is over. The market has a couple of options on where it heads next. They range all the way from resuming the January selloff to resuming the December rally. This window of uncertainty could last until about Tuesday. The market should show its hand by then.
For today, the napkins again suggest early resistance at 1102/1105 with critical backup at 1112/1115. Support again looks like 1087/1092. The fall back from there would be 1070/1075. Breaking below 1070 could put the bears back in control.
Trivia Corner
Answer - The state capitals that begin with the same letter as their states are: Dover (Delaware); Honolulu (Hawaii);
Indianapolis (Indiana); Oklahoma City (Oklahoma).
Today’s Question - Three pounds of apples and two pounds of apricots cost $2.25. The apples cost less than the apricots.
(One final clue - for the same $2.25 you could buy either apples only or apricots only and not wind up with fractional pounds.) How much per pound are the apples?
In this very topical three-part video interview, Ben McLannahan, Asia Lex Writer of the Financial Times, sits down with Jing Ulrich, Chairman of China Equities and Commodities at JPMorgan, to discuss the outlook for Chinese stocks, Chinese market reforms, the renminbi, commodities and IPOs in Hong Kong and Shanghai.
Part 1: What now for Chinese stocks
Ulrich says earnings growth - not easy credit from bank lending - will be the primary factor driving the A share market in 2010.
Click here or on the image below to view Part 1 of the interview.
Part 2: China’s market reforms and the renminbi
Ulrich considers whether a one-off appreciation of the renminbi is possible this year and the extent of Chinese regulators’ commitment of reforming capital markets.
Ulrich discusses the robust pipeline of IPOs coming to the Hong Kong and Shanghai exchanges and recommends commodities likely to benefit from voracious demand from China.
This is an interesting segment from Fox Business aired on Dec. 28, 2009 where John Tabacco from locatestock.com talked about the top five most shorted stocks. The following is a summary of the interview along with some of my thoughts.
The Biggest Shorts - Past & Present
According to locatestock.com, the top short of the decade, and you guessed it, is Lehman Brothers.
But did you know…
Other biggest shorts for the decade include TARP and bailout recipients: Fannie Mae (FNM), Freddie Mac (FRE) and CitiGroup Inc. (C).
Overstock.com (OSTK), at number five, had 140% of its entire outstanding shares shorted at one point of time; giving rise to one very impassioned advocate against naked shorts - Patrick M. Byrne.
Some big players base their short strategy on fundamentals, and sometimes will increase positions over time, or hold their short positions long (more than a year).
The new champion, according to Tabacco, is MSCI Emerging Markets Index Fund (EEM) - the most popular short by volume requested.
Dollar’s Gain Is Commodities Loss
The rising short interest in MSCI Emerging Markets Index Fund (EEM) suggests a continued flight into the perceived safer U.S. market. This trend could further prop up the Dollar, and will likely have a negative impact on commodities, with natural gas probably being the only exception, as the flaming fuel is generally non-dollar reactive.
Dollar & Stocks May Rally Together
However, equities might stand a better chance since the inverse correlation seen between the Dollar and stocks remains broken, as discussed in my article just before Christmas. In fact, this view is reinforced by Dr. Marc Faber, who told Bloomberg yesterday:
“U.S. stocks and the dollar may keep rallying together, reversing a relationship that existed from March to November.”
Faber also said that Dollar may appreciate 5-10% against the euro in the “near term” as bearish betting on the greenback becomes too crowded while equities advance.
The Three Amigos?
Shares of Fannie Mae (FNM) and Freddie Mac (FRE) soared to their highest since October on Monday after the Treasury Dept. signed over the checkbook by removing caps on federal support. Meanwhile, some analysts see Citigroup Inc. (C), with both explicit and implied government support, as ”The Can’t Lose Trade Of 2010.”
So, here is Question of the Day:
Would you buy Fannie, Freddie, Citi, and why?
Hint #1: The pay packages the Treasury announced last Thursday for Fannie and Freddie chief executives consisted exclusively of cash compensation; no shares were offered.
Hint #2: The Treasury Department had to shelve its plans to sell $5 billion of Citigroup Inc. (C) common stock in a public offering just two weeks ago.
Hint #3: CitiGroup, Inc. (C) has boldly gone for a zero valuation allowance since 2006 in its deferred-tax asset; whereas JPMorgan Chase & Co. (JPM) had a $1.3 billion, or 10%, allowance in its $13 billion net deferred-tax asset as of last Dec. 31.
Video Source: YouTube
“Masses are always breeding grounds of psychic epidemics” ~ Carl Jung.
For decades, gold has been considered an asset one either speculated upon or invested in as textbook, defensive asset allocation. However, as a result of either complacency toward diversification or the view that it is speculative, the market is under-invested in gold. Despite the huge success of the largest of the gold bullion ETFs SPDR Gold Shares, (GLD), for example remains tiny in the grand scheme of stock investing. It is only worth 0.4% of the S&P 500’s market cap, and a smaller fraction still of the entire stock markets’ capitalization, as of the end of October.
In today’s Breakfast with Dave, Rosie discusses the Canadian housing market:
It sure looks that way. At a time when personal income is down around 1% in the last year, we have seen nationwide average home prices soar 21% and last month hit a record high, as did sales. In real terms, home price appreciation is back to where it was in 1989. Of course, back then, interest rates were far higher but then again, the economy was in the late stages of a phenomenal multi-year economic expansion, not making a transition from deep recession to nascent recovery.
While the Canadian economy is recovering, overall growth is still barely above zero as manufacturers grappled with excess inventories, a strong currency and a soft domestic demand picture south of the border. Employment conditions have improved, but are hardly that healthy, as we saw in the November jobs report where wages and the workweek were both down despite a constructive headline number (half of which were in the education sector, an inherently difficult area for statisticians to adequately seasonally adjust).
In answer to the question as to whether prices are in a bubble, all we will say is that when we ran some models showing Canadian home prices normalized by personal income or by residential rent, what we found is that housing values are anywhere between 15-35% above levels we would label as being consistent with the fundamentals. If being 15% to 35% overvalued isn’t a bubble, then it’s the next closest thing. We are talking about 2-3 standard deviation events here in terms of the parabolic move in Canadian home prices from their lows. So if it walks like a duck …
In yesterday’s Breakfast with Dave, Rosie shares his thoughts about why the easy money has already been made in equity markets.
Below are 10 reasons why we believe this:
1. For the time being, the equity market is going to have to contend with more chatter of the Fed’s exit strategy.
2. The market also faces a new reality. While employment stabilizing (maybe) is a good thing, it means the era of declining unit labour costs and margin expansion is behind us.
3. Market leadership is beginning to fade as seen by the receding advance- decline line on the big board.
4. Market complacency is a worry with the VIX index back down to 21.25. The good news is that insurance against a correction is priced about as low as it can go. Protection is cheap.
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5. The WSJ (page C1, December 7, 2009) reports that not only have individual investors been selling into this last leg of the rally (then again, the S&P 500 has really done nothing for over six weeks), but pension funds have been rebalancing too.
6. Volume has declined markedly and has surpassed 4.7 billion shares on the NYSE just once in the past three weeks.
7. With the correlation between a weak greenback and a positive stock market above 90% over the past eight months (versus zero over the past 30 years), a countertrend rally in the U.S. dollar would likely coincide with sputtering equity prices.
8. The Dow transports/utilities ratio has turned in a classic triple-top and this is a signpost to get defensive.
9. The latest Investors Intelligence poll shows the bull camp at 50%; the bear share at a mere 16.7%. In other words, there are three bulls for every bear. This is negative from a contrary perspective (another sign of complacency).
10. Corporate bond yields have stopped narrowing over the past three months and have actually recently shown modest signs of an upward bias.
Jeremy Grantham has become a familiar and very popular face on this site. For those treasuring his insight, wisdom and prescient calls, the co-founder and chief investment strategist of Boston-based GMO has just published the October edition of his quarterly newsletter entitled “Just desserts and markets being silly again”.
Before quoting from the report, Grantham recently put matters into perspective in a Kiplinger article, saying: “The recent rally has been very speculative, favoring risky assets over the past few months. I’m sorry if you missed investing at the market’s March lows, but don’t compound the damage to your portfolio by chasing gains in risky assets. We’re at the beginning of a seven-year period of lean returns. You should only be buying the highest-quality blue-chip companies, where valuations are most attractive.”
Here are a few excerpts from the Grantham’s newsletter.
“Corporate ex-financials profit margins remain above average and, if I am right about the coming seven lean years, we will soon enough look back nostalgically at such high profits. Price/earnings ratios, adjusted for even normal margins, are also significantly above fair value after the rally. Fair value on the S&P is now about 860 (fair value has declined steadily as the accounting smoke clears from the wreckage and there are still, perhaps, some smoldering embers). This places today’s market (October 19) at almost 25% overpriced, and on a seven-year horizon would move our normal forecast of 5.7% real down by more than 3% a year. Doesn’t it seem odd that we would be measurably overpriced once again, given that we face a seven-year future that almost everyone agrees will be tougher than normal?
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“Price … does matter eventually, and what will stop this market (my blind guess is in the first few months of next year) is a combination of two factors. First, the disappointing economic and financial data that will begin to show the intractably long-term nature of some of our problems, particularly pressure on profit margins as the quick fix of short-term labor cuts fades away. Second, the slow gravitational pull of value as US stocks reach +30-35% overpricing in the face of an extended difficult environment.
“It is hard for me to see what will stop the charge to risk-taking this year. With the near universality of the feeling of being left behind in reinvesting, it is nerve-wracking for us prudent investors to contemplate the odds of the market rushing past my earlier prediction of 1,100. It can certainly happen. Conversely, I have some modest hopes for a collective sensible resistance to the current Fed plot to have us all borrow and speculate again. I would still guess (a well-informed guess, I hope) that before next year is out, the market will drop painfully from current levels. ‘Painfully’ is arbitrarily deemed by me to start at -15%. My guess, though, is that the US market will drop below fair value, which is a 22% decline (from the S&P 500 level of 1,098 on October 19).
“Unlike the really tough bears, though, I see no need for a new low. I think the history books will be happy enough with the 666 of last February.”
Click here for the full report on Grantham’s reasoning for his cautious stance.
Jeremy Siegel is professor of finance of the Wharton School at the University of Pennsyilvania. But he is perhaps best known for his 1994 book Stocks for the Long Run, in which he explained why he believes buying and holding stocks is the best approach to investing.
In Part 1 of an interview with John Authers, investment editor of the Financial Times, Siegel is asked whether he got it wrong against the backdrop of last year’s market crash.
Click here or on the image below to view the video.
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In Part 2, Siegel explains why the ageing populations in developed countries mean investors need to put money into emerging markets, or risk losing out.
Click here or on the image below to view the video.
Source: John Authers, Financial Times (here and here), October 14, 2009.
David Rosenberg, Chief Economist, Gluskin Sheff, says the market is pricing in 4.0% real return GDP for the coming year. He does not agree that this is attainable, and worse, its already baked in:
IS THE NEWS MAKING THE MARKET?
A market that needs rumours of yet another round of fiscal stimulus at a time when the budget deficit is 13% of GDP for sustenance is a market that is being driven by liquidity. But there were some various non-confirmations, such as (i) the bid in the Treasury market; (ii) lack of volume pickup on the NYSE; (iii) copper fell to a two-week low; (iv) CDS spreads, which measure credit default risk in North America, widened to four-week highs, and (v) John Deere cut its top-line sales estimate for the year to -21% from -19%. Moreover, we see that credit spreads have started to widen out a touch - by around 20bps for Baa and 65bps for high yield - in the past two weeks.
THE RECESSION IS DEAD, LONG LIVE THE RECESSION!
We can understand that there is a growing list of economists calling for the end to the recession, and that may or may not be the case actually, judging by the performance of all four ingredients that go into the NBER decision-making wheel. But let’s be charitable and assume that the herd is correct this time around - a 49% rally from the lows and the degree of multiple expansion suggests that the S&P 500 has gone beyond just discounting the end of the downturn but is now embedding a 4.0% real GDP growth rate for the coming year. That is not our view, and even if it is attainable, guess what? It’s priced in. Corporate bonds (and Treasuries too) are discounting around a 2.0% GDP trend, which looks more realistic.
Bottom line: The market is pricing in a much stronger recovery than is possible right now.
I have been positive on emerging markets for a while, maintaining that especially China and other Asian countries, as well as resource-based Latin American countries, would be the leaders of the economic recovery and stock market performance in the next upswing. These views are supported by a recent Q&A with Mark Mobius, Templeton Asset Management’s guru on emerging markets, as published in the company’s Market Views newsletter.
Emerging markets have been outperforming thus far in 2009, do you think this trend will continue for the rest of the year?
Although we are optimistic about the opportunities for upside potential, it is important to realize the volatility is still with us and will be with us for some time. This means there will be periods when the markets go down as well as periods when they go up. We should therefore take advantage of dips in the markets to buy stocks cheaply, paying attention to valuations and long-term earnings growth prospects in order to avoid buying or holding expensive stocks. We continue to find good value in markets like China, Thailand, Brazil, Mexico, Turkey and South Africa.
What sectors are you looking at now?
Commodity stocks look attractive because many of them have declined below their intrinsic value and we expect the global demand for commodities to continue its long-term growth. Consumer stocks also look attractive. With rising per capita income and strong demand for consumer and other goods, the earnings growth outlook for these stocks is positive.
Will the global equity market retest the low point in March?
There is always the possibility of this happening and it could be triggered by something totally unexpected, such as war breaking out on the Korean peninsula or a massive global flu pandemic. As I have said, markets will continue to be volatile as global economies remain fragile and we should see rises and falls in the months ahead.
Which country do you expect to be the best performer among the BRIC markets?
That would be impossible to say at this time but we think China has a good chance of achieving that goal. Of course, I’m talking about measuring that move from the beginning of this year. Russia also looks very undervalued.
In view of China’s strong market performance, would you say it’s in a bull market?
You can see that it is a bull market since the increase has been so dramatic, but it would be difficult to call it a sustainable bull market in view of its very sharp rise. I still feel we will face volatility and there will be corrections along the way. We do, however, expect China to continue to lead the global market recovery.
Will the Chinese government propose another stimulus package in 2009, and why?
That all depends on the success of the measures already in place. They clearly have the resources to do this again. We should expect them to act if current measures and programs do not produce the desired results.
You mentioned in October that Russia’s cheap stocks were a once-in-a-lifetime opportunity. Since then, the RTS Index in Russia fell a bit more to 498, then subsequently doubled this year. After that great performance, are stocks still good value, or is it time to take a breather?
Russian stocks still look cheap. Yes, they have risen dramatically from their low point but they are still a long way from their previous high. Of course, the PE has risen this year but Russian stocks, as represented by the MSCI Russia Index, are still trading at a single-digit PE of 6.8x as at end May 2009 - an increase from an even lower 3.4x as at end December 2008.
Do the economic problems within Russia - unemployment rising to 10%, inflation at 13%, and possible GDP contraction of 6% - undermine the investment case for the country right now?
These factors will have a short-term impact on the market, but we always evaluate companies on a long-term basis - taking a five-year view. Thus, we are in fact able to benefit from buying stocks at cheaper prices now.
Do you see any parallels between the market crash of 1998 in Russia and the one over the last year? Is there fear focused on this market that leads to sharper crashes than elsewhere? Did you learn anything in 1998 about Russia that helped you navigate this crisis?
No, because Russia and most other markets are in a much stronger position, financially and economically, than they were in 1998. Russia has built up strong foreign exchange reserves and trade surplus that have enabled it to withstand external shocks to its economy.
The Russian market was also affected by the correction in commodity prices due to its high exports of oil and other commodities, as opposed to any extraordinary fear focused on this market. However, we maintain the view that commodity prices will continue to increase in the long term due to greater demand from emerging markets and a relatively inelastic supply. This will thus benefit Russia in the future.
The most important lesson we’ve learnt from 1998 or any other crisis is that markets always recover - it’s just a matter of time. Thus one should always maintain a long-term and patient view with regard to investing.
Lastly, you have been investing in the emerging markets for the last four decades. Being an expert in investing in emerging markets, do you have any advice to share with investors during the current market situation?
It is very important for investors to remember some key principles: (1) diversify - it is important to diversify in order to minimize risk - this is why investing in a diversified mutual fund is best for investors, (2) look globally - no country has a monopoly on good opportunities so you must search globally - this is why we have global emerging-market funds, (3) be patient - don’t expect to obtain quick gains - the long-term investors do best, (4) don’t invest unless you understand the investment you are making - understanding will strengthen your confidence and enable you to make long-term investments.
The singular feature of the great crash of 1929 was that the worst continued to worsen. What looked one day like the end proved on the next day to have been only the beginning. Nothing could have been more ingeniously designed to maximize the suffering, and also to ensure that as few as possible escaped the common misfortune. The fortunate speculator who had funds to answer the first margin call presently got another and equally urgent one, and if he met that there would still be another. In the end all the money he had was extracted from him and lost. — John Kenneth Galbraith, “The Great Crash
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WSJ What's News Late Edition, March 18, 2010by The Wall Street Journal 18 Mar 2010 at 5:54pm
The blue chips make it eight in a row, but stocks end narrowly mixed; New York's Attorney General begins an investigation into the practice of pension spiking; and Apple is still negotiating content deals for the iPad.
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