Managing director of Templeton Asset Management, Mark Mobius believes the recent round of sell-offs in emerging markets was triggered mainly by an increase in interest rates. Mobius says that if US growth slows down as a result of higher interest rates or high oil prices, then emerging markets will be hit further.
Mobius further says that some of the Indian stocks have got a bit expensive, but after the correction, they have started to look good again.
Consumers and commodities are his favourite sectors at the moment.
Excerpts from US headquartered CNBC's exclusive interview with Mark Mobius:
Can you characterise what has gone on in emerging markets over the last three months or so. How severe has it been?
We had a 22 per cent decline but it has now spread all over the place. Turkey was down 40 per cent and Malaysia was down 10 per cent. So there have been a lot of differences between different countries. We have seen an opportunity to buy because we see that valuations are still good, despite the fact that we had this tremendous Bull Run.
Clearly the latest conflict in the Middle East is separate from what you have seen in emerging markets in terms of the sell offs. What triggered this most recent round of selling?
The trigger was mainly due to an increase in interest rates, particularly in Japan and also in the US, where a number of hedge funds were borrowing money to go into emerging markets. They were borrowing cheap money and going into emerging markets. And as rates went up they had to get out. So I think that was the real trigger.
But at the same time rates in emerging markets are not going up, they are actually going down?
That's right, of course not in all emerging markets. Some rates are going up in some markets. Rates in many of the emerging markets have been going down while US rates have been going up. But the money going into emerging markets of course has come from Japan, from the US and that's where the rates have begun to interrupt.
Tell me where you are finding value now?
Right now, of course Turkey is one place where we are finding value; South Africa is another place where we are finding value and selectively in some places like Taiwan, in Brazil and very selectively in Russia.
Is this value happening as a result of strengthening fundamentals in those economies? What's the backdrop of the investing picture in some of those economies?
We have seen very good earnings growth, which continues to happen in these countries an also the price earnings, the price to book values are still very attractive relative to the US market. That's where we are seeing lots of opportunities.
In terms of sectors which sectors are you favouring now?
Two sectors, consumers and commodities. We are big on oil and other commodities, we think that there has been an overshooting in some areas but still with the correction, these companies will be still making a lot of money.
You do think that this oil story has lags and it's going to continue going. A lot of people wonder if in fact even though we have got crude oil at USD 73 a barrel, if some of the stocks have gone ahead of themselves?
That's true. There is no question that alternatives are going to come in. I was looking at Alberta oil sands and if this comes in, its going to increase the supply. But that's expensive oil. So even at USD 40 a barrel, the companies in which we are investing will be making a lot of money.
The Rosneft IPO came to the market recently. There was a lot of controversy about it. Did you buy shares?
No, we didn't buy. For two reasons, one, it wasn't cheaper than Lukoil, as you know we have a big holding in Lukoil. Second, there is the possibility of legal action against people who buy those shares. So we figured it was just not worth it. It had to be at a significant discount.
Do you mean there could be lawsuits and legal actions because Yukos assets were melded into Rosneft and people might say look that was stealing?
Exactly. They could say, look you are dealing in stolen property and therefore you are liable.
Tell me how tough it's been to invest in Russia. We hear stories about how they cut oil to the Ukraine and the government just changes the rules of the game at any moment. Tell us how tough it is to put money in that country?
It's not that bad and we have made a lot of money in Russia. We have done private equity deals there and public equities. We feel it's a better environment, it's getting better than before. On the matter of oil and gas prices for Ukraine, for example what they are doing is moving towards the market price. These countries have been getting huge discounts for the gas. So it's only fair that the Russians begin to ask for higher price.
Tell me some of the other sectors, which you are finding value in?
On the other side of course is consumer. We are very bullish on consumer because we have seen in the last 4-5 years, in emerging markets per capita income is going up by 50% compared to 25% in the developed countries. So we are seeing tremendous opportunities in many consumer areas. One for example is in consumer banking, which is why we are big on banks. Loans, for mortgages, for personal consumer spending has been blossoming in these countries.
We see a better standard of living increasing throughout the emerging markets that we see things like credit cards and banking services take hold, right?
Exactly. That's where the excitement is. Also in other areas, for example cell phones, now there is almost 400 million cell phones being used in China today and that's growing at millions a month. That's another area just products - product sales.
Have we ever seen another moment in time where we are looking at virtually every economy around the world seeing growth, that's pretty extraordinary?
It is very extraordinary. We are living in very good times and do not forget the US is also growing, Europe is growing not as fast as emerging markets but that's a very good environment for investing.
You are focused on emerging markets but do you actually own US stocks. Would you be putting money in the US right now?
We do selectively buy some US stocks and US stocks have gone cheaper as you know. If you look at the price earnings ratio of US stocks it has come down significantly. Stocks like Avon for example we held that for a while to get exposure to China and other countries where Avon is moving. Of course, we prefer pure emerging market plays but there are a number of US companies taking advantage of what's happening in emerging markets.
What are you selling right now? Is there a market or economy, which you are not going to touch?
That's a difficult question. Maybe some of the Indian stocks have gotten somewhat expensive but you see with this correction, even Indian stocks have begun to look good again. So we are not really selling anywhere in size.
What changes this situation as far as the opportunity around the world given the recent sell offs?
US growth. If US growth slows down as a result of higher interest rates or high oil prices or whatever, then emerging markets will be hit and the globe will be hit, everybody will be hit.
But we are seeing a slow down already, right? We got the GDP report out today and it was 2.5%. It was a slow growth?
It is a great concern of ours to see slowdown on growth. We have to watch that very carefully.
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