Look Beyond Short-Term Turbulence In Emerging Markets

http://www.ft.com/cms/s/0/efa289c2-d995-11e2-98fa-00144feab7de.html#ixzz2X2DFzLUx By Mark Mobius The long-term emerging markets picture is bright, says Mark Mobius Emerging stock markets ended May in decline, with concerns that the US Federal Reserve could taper quantitative easing (QE) measures earlier than expected accompanied by a sharp correction in Japanese bonds and profit-taking in Japanese equities. June has been even worse – QE worries are still with us, there have been riots in Brazil and Turkey and softer economic data out of China. Not surprisingly, this has hit emerging market bonds, stocks and currencies hard. This week, the Indian rupee hit an all-time low against the dollar. It is not a pretty picture. But the longer-term case for emerging markets is much more persuasive. Looking back, for example, in 10 of the past 12 calendar years, emerging markets have outperformed developed markets. One major reason I remain positive on emerging markets is growth. Although short-term global GDP forecasts have tended to drift lower as quarterly releases have missed expectations in a number of markets, I think 2012 will mark the low point in overall growth, with acceleration anticipated in 2013 and in subsequent years. I expect emerging market growth in 2013 and beyond to continue to be much stronger than growth in developed markets. As well as feeding into corporate profitability and valuations over time, this economic growth is likely to drive rising demand for commodities. Augmenting overall growth patterns, industrialisation and urbanisation in emerging markets are likely to increase commodity demand further, which over the longer term will drive commodity prices ahead. While commodities, exports and infrastructure development continue to be leading growth drivers in many emerging market economies, overall growth is likely to come increasingly from domestic sources. Expanding consumer wealth is creating an increasingly large and discriminating body of middle class consumers across emerging markets, and their demand – for cars, electronics and other consumer goods and services – is in turn creating increasingly significant domestic economic activity. Consumer indebtedness in emerging markets is far lower than in developed markets, so emerging market consumers have commensurately greater capacity to gear up their demand. In addition, demographic factors are far more favourable in many emerging markets than in many developed markets. With a relatively high proportion of the population in emerging markets moving into the workforce and a relatively low proportion of dependants, demographics are helping to reinforce consumer demand. Even in markets such as China, where demographics are less clearly favourable, productivity gains from moves out of agriculture and into manufacturing and service industries still provide a positive influence on growth and domestic demand. As emerging markets become more mature and investors in the asset class more varied and sophisticated, niche product offerings are becoming increasingly significant. For example, smaller companies represent a distinct opportunity within the emerging markets universe, providing exposure to businesses at an early and fast-growing stage of their life cycle. Private equity and private investment in public equity vehicles also help address these young, dynamic businesses. Within emerging markets. “frontier markets” enjoy strong growth arising from their low starting base, abundant natural and human resources and the availability of easy gains from market reforms and injections of technology into relatively low-wage economies. They are relatively under-researched, so undervaluation and pricing anomalies abound. Nowhere is this more the case than Africa, which I feel represents an investment destination on its own account. There are those who say the link between GDP growth and market returns is tenuous. Maybe. But investors don’t buy markets, they buy companies. For all the attractive trends outlined above, investors should always be looking for those stocks that are most underpriced relative to their long-term potential. In frontier markets, that potential is largely about capital growth. But increasing numbers of emerging market companies now trade on attractive dividend yields, and income is becoming a bigger component of total returns. Mark Mobius is executive chairman of the Templeton Emerging Markets Group Taylor Scott International