What does the return of Dr Mark Mobius tell us about the prospects for emerging markets? Brian Tora reflects on whether these markets are worth revisiting
Learning that Dr Mark Mobius was to come out of what turned out to be a very brief retirement to run a new emerging markets fund at the ripe old age of 81 made me think. Mark Mobius was incredibly well known as the head of the emerging markets team at Templeton and lead manager of the Templeton Emerging Markets Investment Trust. He was early into the business of spotting opportunities in these lesser developed countries, but was soon followed by the world and his wife in establishing investment capability all around the emerging world.
Ahead of the crowd
Templeton had established something of a track record in finding where the next sweet spot for investors might arise. The rapid growth of Japan’s industrial capability throughout the 1960s and 1970s delivered massive returns to those prepared to back one of the clear losers from the Second World War. Sir John Templeton, American born but a British citizen, was in the vanguard of those prepared to stake money in the Japanese recovery.
From being the manufacturer of cheap replicas, Japan became the provider of high quality goods, with many of their companies becoming household names around the world. As has so often proved to be the case, investors’ enthusiasm to jump aboard this particular bandwagon drove share valuations to unsustainable levels. The peak for the Nikkei 225 Index was achieved at the end of the 1980s. By then Templeton had already jumped ship, preferring to source their ideas from cheaper markets. As readers will no doubt be aware, even now, despite several years of good stock market performance, Japan’s benchmark index lies well below the level reached nearly 30 years ago.
The emerging markets question
We had a similar, though less dramatic, rise in emerging market share valuations. The simple argument that these are populous nations, enjoying a strong work ethic, with much catching up to do on the developed world, encouraged investment managers to pile in willy nilly, regardless of the price they paid. I well recall Bruce Stout, manager of the Murray International Investment Trust, pointing out that subsidiaries of multi-nationals quoted in these countries enjoyed premium ratings to their parents, even though the extra benefits they might accrue were far from obvious.
Since the financial crisis of a decade or so ago, emerging markets have been far from a one way street.
Extravagant share ratings have, by and large, been consigned to history and value undoubtedly exists. But the astute investor will be only too well aware that emerging markets cover a wide variety of nations and economic experiences, not all of which have proved beneficial in recent years.
Those countries, like Brazil or South Africa, where economic prosperity relies heavily on buoyant commodity prices, suffered hugely in the downturn that followed the financial collapse of 2008. Nigeria and Russia have felt the pressure from falling oil prices, while political instability, such as in Thailand in years past, can also undermine confidence. And this is before you get started on such topics as corporate governance, accounting standards or financial transparency – let alone government-inspired corruption.
What’s in a name?
But what exactly are the emerging markets? Lord Jim O’Neill coined the term BRICs, meaning Brazil, Russia, India and China, when he was chief economist at Goldman Sachs – a position he left in 2013 to become a minister in David Cameron’s government. He later introduced the concept of MINT, or Mexico, Indonesia, Nigeria and Turkey, countries which, while not as populous as the BRIC group, nevertheless were of a considerable size. And then there are all the lesser fish in Africa, the Far East and the Middle East, South America and even Europe.
So, emerging markets cover a diversity of nations with widely differing economic drivers. Arguably many of those included in the terminology might reasonably be considered now as part of the developed world. Is China, now the second largest economy in the world and probably due to take the top spot before too long, really a lesser developed market? Dr Mobius appears to think so and so does the MSCI index compilers. And what about those termed Frontier Markets? There are 29 in the MSCI universe, many of which feature in emerging markets funds.
Taking this last group, Nigeria and South Africa feature here, alongside more obvious candidates as Vietnam, Argentina, Kenya and Romania. If this gives any sort of steer, it is that those advisers tasked with selecting funds in these regions need to take particular care to consider in detail how the underlying portfolio is managed when they are carrying out research and due diligence activities.
That there is value amongst shares quoted on emerging markets’ exchanges is clear.
That risks are involved is a given. And the funds that are available – and there are many – will be run to different philosophies and embrace many diverse approaches. Don’t discount including exposure to emerging markets for your more adventurous clients by any means, but don’t underestimate the task of choosing which approach, or combination of approaches, is most appropriate.
