When Mark Mobius joined Franklin Templeton in 1987 as president of the Templeton Emerging Markets Fund there were only six countries he could invest in; Hong Kong, the Philippines, Singapore, Malaysia, Mexico and Thailand. Now, there are more than 80 countries open to Mobius and lead portfolio manager of TEMIT Carlos Hardenberg.
Of those 80 their preferred markets for investment today are Romania, Kenya, Bangladesh, and Peru, where they are seeing encouraging reforms and supportive demographics.
“Over the past five years the global environment has been very fragile,” says Hardenberg. “We have had issues in South Africa, Argentina, the Middle East – and now Trump and Brexit. We take the pulse of countries to work out where to invest. How easy is it to get a license to do business? What is the impact of the internet? Is there a brain drain? Are the demographics supportive of economic prosperity?”
Mobius added there were big opportunities in Africa in particular, where landmass was larger than the majority of other emerging markets combined, describing the continent as a “treasure house of natural resources”, with oil, gas, timber, agriculture and precious metals. Of the top 10 fastest growing economies in the world, eight of them are African. African companies make up 20% of the Templeton Frontier Markets fund run by the pair.
The team also highlighted an unlikely source of future returns – Iran.
“Saudi Arabian companies are exemplifying what we like to see in frontier markets,” said Hardenberg. “Liberalisation, reform and opening up to foreign investment.”
Mobius added: “We are potentially very excited about Iran, in 10 years’ time we will be investing there for sure. It will be a bigger market than Saudi. If sanctions were lifted it would have a transformative effect.”
Embracing Privatisation
In the week that Labour Party’s manifesto in the UK reveals plans to re-nationalise Britain's water companies, energy industry, railways and Royal Mail, Mobius talked of the benefits to economic development that privatisation has brought across emerging markets.
“We have always encouraged more privatisation, wherever we have done business,” he said. “In Romania in particular with have been instrumental in this process. Privatisation encourages greater corporate governance, companies pay attention to shareholders, shareholder are rewarded with income and gains and economies become more efficient.”
Impact of Passive Funds in Emerging Markets
Passive funds cause considerable market volatility in emerging markets, says Hardenberg. In June 2013, MSCI announced plans to upgrade both Qatar and the UAE to emerging market status, at the time HSBC estimated inclusion in MSCI’s Emerging Market Index could attract near $1 billion inflows into the two countries’ markets as index tracking funds were forced to include the markets in their emerging market funds and ETFs.
While this had a short-term positive impact on the markets – they rose in excess of 60%, they then went into a prolonged dramatic correction.
“This is a casino development,” said Hardenberg. “I am not sure how you solve it.”
The TEMIT team do not use MSCI’s classification for emerging and frontier markets, instead creating their benchmark where no country can make up more than 10% – unlike a market cap weighted index which sees China dominate with 35%.
“Passive funds have a tremendous impact on our industry and on the market,” continued Hardenberg. “You will end up with a big divide between the truly active managers and passive funds. You will see more active managers accused of index tracking, and passive funds will take that market share.”
