For the next installment of our “New Year’s Vantage Point” blog series, today we hear from Mark Mobius, executive chairman of Templeton Emerging Markets Group.
TEMPLETON EMERGING MARKETS GROUP
Mark Mobius, Ph.D., Executive Chairman
We are generally positive on the long-term prospects for emerging and frontier market equities. In our opinion, the economic background for many emerging and frontier markets is stronger than that prevailing in many developed markets. Although estimates for emerging-market economic growth in 2012 have fallen in recent months, they generally remain well in excess of those for developed markets. Moreover, unlike developed markets, many emerging and frontier markets still have ample room for fiscal and monetary stimulus. Although weak growth in developed markets could be transmitted to emerging markets, notably through declines in world trade, this influence could continue to be offset in emerging markets by higher investment spending and increased domestic demand.
We would expect the key Chinese economy to likely show somewhat stronger growth in 2013 than was seen in 2012 as stimulus measures work through the system. Following the leadership transition in late 2012, we anticipate the authorities will continue to reposition the Chinese economy to depend less on export and investment spending and more on domestic demand. Efforts to tilt activity away from low value-added and labor-intensive industries toward higher-technology activities will likely continue as wage levels move up and as the labor force in China becomes ever more educated.
Turning to other major emerging and frontier markets around the world, economic reforms announced in India, if carried through, could free the Indian economy from some of the administrative bottlenecks that have hampered activity. Brazil has been showing signs of adopting policies designed to put more money in the hands of the lower income population segment, which should improve consumer-oriented industries. Also, the country’s resources industry could benefit from increasing Chinese activity and demand for raw materials. In Russia, plans to develop abundant natural resources in the eastern provinces in order to service the Chinese market could stimulate growth in both countries. Not to be left behind, some frontier markets, notably in sub-Saharan Africa, have seen progress in economic reform and market liberalization, which has been providing additional sources of growth.
We believe that the strong prospects for growth in many emerging markets are not currently recognized in equity valuations that lagged those of world markets, in some cases by a considerable margin, near year-end. Our fundamentals-based, company-by-company investment research metrics have led us to identify many companies that we believe can offer attractive long-term investment prospects. Two particular investment themes stand out to us: consumers and commodities. The consumer theme arises from consumers in many emerging markets becoming increasingly wealthy while macroeconomic policy has increasingly been aimed at moving from export-based models toward ones fueled by domestic demand. The commodity theme reflects our expectation for strong growth in demand for hard and soft commodities as many emerging markets industrialize, likely grow wealthier and increase spending on infrastructure, which tends to tilt the balance between supply and demand for such products in favor of producers. In regional terms, we have been finding opportunities in many markets, but we are particularly excited by the potential that we are discovering in frontier markets, notably in Africa.
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What Are the Risks?
All investments involve risk, including possible loss of principal. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Investments in foreign securities involve special risks including currency fluctuations, economic instability and political developments. Investments in emerging market countries (of which frontier markets are a subset) involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets. Such investments could experience significant price volatility in any given year.