This past Tuesday, Templeton Asset Management executive chairman and emerging markets veteran Mark Mobius made a case in the Financial Times (UK) for investing in emerging and frontier markets. Mobius wrote:
Emerging markets, however, offer a number of important reasons why investors should adopt a positive view for the long-term.
While global growth has slowed, emerging markets are still expected to grow at a much faster rate than developed markets. Predicted growth for emerging markets is an average of 5 per cent in 2009, compared with 1 per cent expected in developed markets. Of course that is not to say that a prolonged slowdown in the US economy will not affect emerging markets, but the impact will be much less than would have been the case 10 years ago.
In the past, the US was the largest importer of goods from Asia and other emerging economies, but trade in emerging market countries is now much more diversified, with many exporting to new markets, decreasing their dependence on the US. Today, Asia exports more to China than to the US. While the US is still the largest and most influential economy, this influence has gradually diminished as other economies continue to grow at much faster rates.
Although the slowdown in the US has hurt Asian exports to some extent, economies in Asia are becoming more domestically driven, and indeed the services sector is gaining importance, especially in China and India. This, combined with government expenditure in areas such as infrastructure as well as private domestic consumption means that emerging economies should be able at least partially to offset the decline in growth resulting from slowing exports with an increased economic independence.
The accumulation of foreign exchange reserves also puts emerging economies in a much stronger position to weather external shocks with reserves, for example, in China, totalling more than $1,900bn.
Most importantly for value investors, the current valuations of emerging markets remain attractive. The benchmark MSCI Emerging Markets index is trading at a price/earnings ratio of 10.7, down from 18.5 a year earlier. They are in fact even cheaper than developed markets such as the US which is trading at a p/e of 16.5. Markets such as Turkey and Russia are down to single-digit p/e’s, making them especially appealing. Of course that is not to say that this is definitely the bottom - that would be impossible to predict. However, taking a long-term view, these valuations are certainly attractive.
Lake Bled, Slovenia
Mobius, who has spent 40 years working in emerging markets all over the world, also talked about investment potential of frontier markets. He wrote:
In addition to emerging markets, frontier markets are looking interesting and could become tomorrow’s emerging markets. We opened an office in Vietnam earlier this year to allow us to study closely the companies there and in the Mekong region.
Additionally, the larger frontier markets such as Slovenia, Romania, Croatia, Kazakhstan and Ukraine are also beginning to look good.
The Middle East is a region of great interest and will be the focus of continued research. In fact, we recently also opened a new office in Dubai to allow us to capture the growing opportunities in that region.
We are impressed by the Middle East’s economic performance and believe that the potential for economic growth and development remains considerable, especially if the current trend toward the implementation of political and economic reforms remains on course.
The markets may continue to be volatile at times, but the underlying fundamentals of emerging markets remain intact. Currently markets around the world are substantially down and we are probably nearing levels of maximum pessimism…
Source:
“Emerging economies have not lost their appeal”
Mark Mobius
Financial Times (UK), October 21, 2008
Sphere: Related Content
