This article is part of Morningstar's "Perspectives" series, written by third-party contributors. Here, Mark Mobius, executive chairman at Templeton Emerging Markets Group, explains his outlook and strategy for investing in BRIC and African economies.
Growth in BRIC economies has slowed down in 2012 and early 2013. They are now facing major problems. How do you perceive the macroeconomic situation in each country? What are their major risks?
It is a bit of an exaggeration to say that the BRIC countries are “facing major problems”. The BRIC countries’ GDP growth rates have slowed, but apart from Brazil, the other three economies are still growing much, much faster than most developed countries. Investors are concerned that China’s growth rate has slowed to 7.7%, but when was the last time the US, Japan, Germany or the UK saw that pace of GDP growth? One should also keep in mind that as these countries grow rapidly, the base gets bigger and it is therefore much harder to maintain the double-digit growth rates seen previously. China is now a US$6 trillion economy, second only to the US. The fact that an economy that size can grow at close to 8% is in itself an amazing feat.
On a country by country basis:
Brazil
Brazil continues to show tremendous potential. It has a young and large consumer population and vast mineral and farming resources. With rising income levels, Brazil is likely to become an important market for consumer goods. President Rousseff’s government is very focused on eradicating poverty and expanding the middle class. Some of the changes have created short-term problems for a few companies, but we think they will make the necessary adjustments and eventually get it right. Inflation and low growth could be of concern in the short term. There is also a need to remove some of the bureaucracy and free up the economy. In our opinion, the complex tax code clearly needs revision, and acceleration in the granting of concessions by the government to improve infrastructure is also vital to support stronger growth for the country. The quality of investment in education is another area that could benefit from improvement.
Russia
The Russian economy is very dependent on the price of oil, and if oil prices stay high, Russia’s economy is likely to continue to hum. Like China, it is facing an aging population problem. However, the middle class should continue to swell as wealth from commodity exports filter down into the economy. Businesses supplying consumer goods and services to this burgeoning market appear to have the potential to benefit. Russia’s financial structures are underdeveloped and consumer debt levels are generally low. The Central Bank left its benchmark interest rate unchanged at 8.25% thus far this year in view of rising inflationary pressures. Russia suffers from an investor-confidence issue, demonstrated by the persistent outflow of capital from this market. If the government can instill good governance in corporate giants like Gazprom and Rosneft, we think the situation could change quickly.
India
In our view, bureaucracy is the biggest problem in India, the world’s second-most populous country, and Indians themselves often joke that the country grows in spite of government policy, not because of it. One should note that there is a huge disjoint between what the elected government wants to achieve and what the bureaucrats are willing to do to help the government achieve its goals. India’s Prime Minister and Finance Minister have been very active in encouraging more foreign investment into the country, but when investors try to bring capital into the country, they are often overwhelmed by red tape. There have been significant improvements in corporate governance, including the launch of an electronic voting system that could help raise the voice of minority shareholders. However, we think there is more to be done in terms of minority shareholder protection, especially from related-party transactions. India has a vibrant stock market with thousands of listed companies and a strong culture of entrepreneurship and investment.
China
Chinese equity markets have been volatile, as bouts of enthusiasm have often been followed by fears of government tightening measures. The property market has presented the Chinese government with a great challenge. It needs to maintain prices at affordable levels but must also ensure that its price control mechanisms do not cause a crash in property price. China’s economic data has generally remained positive. As we said more than a year ago when there were questions as to whether China was going to have a “soft or hard landing”, we did not think that China was going to “land” at all but that it would keep on growing at a robust pace. Exports have remained resilient while domestic consumption is picking up rapidly as wages rise and disposable income increases. The Chinese government has over US$3 trillion in reserves, and thus its ability to stimulate the economy when needed cannot be questioned.
Outperformers in the past, the BRIC markets have been underperforming in recent years. The BRIC asset class has also been recording outflows. Do you expect these trends to continue?
No single market will outperform others on a consistent basis. If we look at historical returns, the best performing market in one year is seldom the best performing market the following year. Hence, it is important to be properly diversified, investing across all markets. There have been some outflows from BRICs as the so-called “hot money” goes in search of short-term gains, but this is usually a good sign that a market has hit a bottom or is close to the bottom. While we cannot predict what will happen to stock markets, we can confidently say that (1) emerging economies, driven by the BRIC countries, have been growing much faster than developed countries like the US and are likely to continue to do so for many more years; and (2) most investors today are chronically underweight emerging-market equities. While emerging markets now represent about 35% of global market capitalization, most investors have less than 8% invested in this area.
One of the themes discussed at the BRICs Summit was infrastructure in Africa. What is the current involvement of the BRIC countries in Africa infrastructure and how it will shape the markets there?
The BRIC nations have pulled together combinations of economic development and investments to propel rapid economic growth to a cohort of new economies, especially several in Africa, including Egypt and Nigeria, as well as others such as Indonesia, Vietnam and Turkey. Opportunities continue to beckon particularly as BRICs nations’ growth rate influences many frontier markets, considered a subset of emerging markets.
Emerging economies in Africa could not only help offset any growth shortfall that might occur as the BRICs mature, but by supplying resources and markets, they may also help to insulate more established emerging economies from the impact of sclerotic growth and slowing demand in developed countries. Newer markets typically have more room to grow, and the search for growth potential amid acute global volatility has been encouraging many investors to expand their horizons. Africa is also well known for its wealth of natural resources, much of it barely developed, which includes oil and gas, a variety of metals and minerals, as well as huge tracts of agricultural land.
What is the role of China in Africa now? How did China and Africa’s economic ties evolve from trade and project contracting to investment and finance, and how will they advance further?
We believe that China plays a role in the development of African countries. For example in Ghana, during our visit to the Central Bank, we met a very competent group of executives eager to promote Ghana as an investment destination. Their current focus was on containing inflation and creating a stable business environment. Credit in recent years has been tight, but the Chinese government has continued to provide loans. Since 2007, all university and college institutions in Ghana provided Chinese language courses. This initiative reflected China’s growing role as a superpower and Ghana’s close ties with China. Chinese involvement in the country goes far back and has been close since the 1960s, when President Kwame Nkrumah lobbied for China’s reinstatement in the United Nations.
Another example is Kenya, which we think has an attractive position as a centre for India’s and China’s investments and interests in Africa. We have seen many companies setting up their operations in Nairobi, Kenya’s capital city. The United Nations also has a large base there that it uses for its operations on the rest of the continent.
Before arriving for the BRICs Summit in South Africa, Chinese President Xi Jinping visited the United Republic of Tanzania and Congo Republic. What could the visit bring to the table in term of boosting the local economy? What is the role of South Africa in particular?
These countries could benefit from Chinese investments in Africa alongside countries like Nigeria and Kenya. The Chinese have been very focused on investing primarily in infrastructure in Africa – building roads, railway tracks, power plants, and so on. Such investments provide the backbone for economic activity and growth.
South Africa is the largest economy in Africa, and it is the only country on the continent where we think the “frontier” market label doesn’t apply. South Africa stands out among its African peers with a large, wide, deep and liquid equity market. Moreover, a number of South African companies provide exposure to markets further north that might be difficult to secure locally. South Africa’s corporate governance is held in high esteem by many in the global investment community, and it is also a country that has proven able to reinvent itself politically and economically. We believe South Africa and its people appear well positioned for greater long-term prosperity.
Could you name some frontier countries that have significant growth potential and explain why?
Individual countries such as Nigeria and Kenya are projected to continue growing faster than other economies globally. Growth on this scale has created burgeoning middle-class populations and dynamic domestic economies that can provide opportunities for consumer companies as well as a degree of insulation from problems in developed markets.
Nigeria is the second-biggest sub-Saharan African country with plentiful natural resources, but at present it is held back by a critical lack of infrastructure, notably power. The country’s reformed banking system has provided an attractive means to invest in a fast-growing domestic economy, in our view, and we will look to invest in other areas as regulatory reform proceeds.
Kenya, with a new constitution following serious political disturbances in 2007, is attractive to us both for its significant natural assets, notably in agriculture, and as an entry point for much of the investment into the rest of Africa. A well-regulated telecommunications market provides opportunities to invest in mobile telephony, in our view, while investment opportunities in retail and banking are also available.
Myanmar is also another country where we see opportunities. Firstly, our hopes are high that Ms. Aung San Suu Kyi will nurture this historically troubled nation into a new era of democracy and personal freedom. We had already witnessed an improvement in Myanmar’s relations with the rest of the world, signaled by a visit from US Secretary of State Hillary Clinton, an exchange of ambassadors with the US, and collaboration with the International Monetary Fund (IMF) on currency reforms. As we see it, for Myanmar to realize its full potential, it must work to convince Western countries to ease or eliminate sanctions, bring in foreign direct investment and develop its infrastructure. We believe investment is essential to the reform process, and successful reforms generally raise economic productivity, which in turn could help bring more goods and services to the public.
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