INVESTMENT FUNDS REPORTER
Fund manager Mark Mobius is bullish on emerging markets, saying he isn't surprised they have started to catch fire again after sputtering earlier this year.
Stocks in the developing world are headed toward double-digit returns in 2011 as investors realize that many emerging markets are safer plays than debt-challenged euro zone countries with large deficits, says Mr. Mobius, who runs $56-billion in assets for U.S.-based Franklin Resources Inc.
After sustaining losses earlier this year amid jitters about the unrest in the Middle East and North Africa, emerging market funds have begun to gain traction again over the past couple of weeks. The sector attracted $5.7-billion (U.S.) in new money this past week - the highest influx of funds into the area in more than six months, according to Boston-based fund tracker EPFR Global.
The return of investors appears to coincide with the resurfacing of debt problems in the euro zone after Portugal asked for a bailout earlier this month, Mr. Mobius said.
"There is a growing realization that, given what is happening in Greece, Portugal, Spain and Ireland, maybe the developed markets are not as safe as they may appear," the Singapore-based manager said in an interview. "Trust in emerging markets is growing because [investors] have seen the [strong] growth rates in these countries."
Mr. Mobius said emerging-market economies are growing about three times faster than their developed-market counterparts. He believes consumer products companies as well as financial service firms will benefit from rising incomes in the fastest-growing parts of the world. That's why he owns big Brazilian banks such as Itau Unibanco Holding SA and Banco Bradesco SA.
Mr. Mobius's flagship funds in Canada include Templeton Emerging Markets fund, which has posted an average annualized return of 5.4 per cent over 15 years compared with 6.3 per cent for MSCI Emerging Markets Index. His younger Templeton BRIC Corporate Class has posted an annualized return of 9.7 per cent over five years versus 8.6 per cent for that index.
Mr. Mobius "is a good manager," but running north of $50-billion is "an awful lot of money," said Dan Hallett of HighView Financial Group. "The performance [in his broad-based emerging-markets fund] has been fine, but not outstanding. ...When running that amount of money, it can be more difficult to outperform. And the fees for this fund are quite high - north of 3 per cent."
The MSCI Emerging Markets Index surged 52 per cent in 2009, including reinvested dividends. It gained 13 per cent in 2010 before hitting a bump in January. In addition to the unrest in Egypt and Libya, the index was dragged down by fears that the Chinese government might be trying to rein in the country's runaway growth to avoid fuelling a property bubble and feeding inflation.
Despite those concerns, Mr. Mobius is still finding some of the world's most compelling valuations in China. While the Asian country raised rates again last week to fight inflation, he is confident it can withstand the tightening. "They are not going to jeopardize the growth rate," which should come in at about 8 per cent this year, he said.
China's Shanghai composite index is up 7.6 per cent so far this year. Mr. Mobius, who invests in Chinese companies through so-called H shares listed in Hong Kong, is finding opportunities in the oil sector with holdings such as PetroChina Co. He also likes the transportation sector and owns shares in some port operators, including Shenzhen Chiwan Wharf Holdings Ltd., which is among the top holdings in his new Templeton Asian Growth fund.
Mr. Mobius is also a fan of Brazil and is not concerned that its market has been treading water this year. "It had an incredible run so there is a pause before the next run," he said. His favourite stocks include Brazilian oil giant Petrobras, and also Vale SA, the world's largest iron ore producer.
While Indian stocks have been rebounding after a slide that began in November, he finds them expensive. The market is trading at a price to estimated earnings in the high teens. But there are opportunities in areas such as aluminum, chemicals and software services, he said.
He acknowledges that emerging markets will face headwinds. The lack of reform in the global banking system, especially the refusal to separate commercial and investment banking, could lead to a "recurrence of the speculation" that led to the 2008 crisis, he warned.
And there may be increased volatility in emerging markets because of political unrest, he said. "The Middle East situation is a sign of the times."
THE TOP FIVE
PetroChina Co. Ltd.: This energy giant has been on a spending spree recently in Canada's oil patch, buying half of Encana Corp.'s B.C. shale gas project for $5.4-billion.
Vale SA: The Brazilian mining giant has bid $1.1-billion (U.S.) to buy South African copper producer Metorex Ltd. to diversify its business from iron ore to steel.
Petroleo Brasileiro SA: The Brazilian oil giant's newest offshore field, Libra, may hold almost twice as much oil as its nearby Tupi field.
Anglo American PLC: The U.K.-based miner is building up its iron ore, copper and nickel mines in South America in reaction to soaring prices.
Itau Unibanco Holdings SA: This Brazilian financial institution controls 11 per cent of Brazil's retail banking market.
© 2007 The Globe and Mail. All rights reserved.
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