EM Guru Mark Mobius Flip Flops Anew: EM Sell Off Nears End

One of the costs of wildly fluctuating markets has been to expose on the confusions of experts, who try to preserve their public image.

For example I noted that EM guru cheerleader Mark Mobius, who claimed at the start of the year that EM outflows will turn into inflows, suddenly made a volte face last week to predict that EM outflows will “deepen”. This call was made when markets had been going on the opposite direction of his early forecasts.

Now that EM financial markets have shifted from Risk OFF to Risk ON, Mr. Mobius changes his mind for the second time over the past two weeks.

From Bloomberg:

The selloff that triggered the worst start for emerging-market stocks in four years is approaching the end as valuations begin to look attractive, Templeton Emerging Markets Group’s Mark Mobius said.

“We are nearing the point where people are beginning to say ‘hey, it looks pretty good now in terms of valuations,’” Mobius, who oversees more than $50 billion in developing-nation assets as an executive chairman at Templeton, said in an interview on Bloomberg Radio today. “We are probably nearing the end of this big rush out of emerging markets.”

The comments mark a shift in sentiment for Mobius, 77, who said on Feb. 7 that developing nations could “expect a lot more selling.”

The issue of “pretty good now in terms of valuations” depends on how one sees the current environment. 

In my view, when EM economies are facing weak currencies, increasing CPIs and higher bond yields (indicative of higher interest rates) amidst elevated debt levels, then accordingly this means a shift in the valuations landscape as the same factors will not only alter the profit environment, they will also have an impact on consumer demand, credit conditions and credit quality and the supply side growth. If such a shift will be disorderly then this may even lead to a drastic change in the political environment that could also impact again valuations.

In short, a benign environment from zero bound rates and a convulsing environment, which are symptoms of resistance to change against rising rates amidst high debt levels, will extrapolate to apples and oranges comparison. Thus failure to understand such transition would lead to confusions.

And because fund managers earn from varied fees (e.g. Franklin Templeton) from their investor’s portfolio it is understandable for them to promote their interests. Talking down the fund's investment themes may lead to investor withdrawals thus reducing fund fees.

The point of this exercise is not to disparage any experts, particularly on Mr. Mobius whom I respect, but to show of how sharply gyrating markets entwined with industry interests seem to have led some experts to vacillate on their forecasts.

EM Guru Mark Mobius changes outlook, says EM outflows will continue

Emerging market fund manager Franklin Templeton’s Mark Mobius predicts that the outflows on emerging markets will continue.

From Bloomberg:

The worst isn’t over for emerging markets after the benchmark stock index sank to a five-month low and the nations’ currencies tumbled, said Templeton Emerging Markets Group’s Mark Mobius.

“The negative sentiment is pretty much in place so you can expect a lot more selling,” Mobius, 77, who oversees more than $50 billion in developing-nation assets as an executive chairman at Templeton, said in an interview from Rio de Janeiro today. “We are looking but actually not buying at this stage. Prices can come down or take time to stabilize.”

The same article notes that in an interview last January 29 Mr. Mobius predicted that “inflows into developing nations would resume later this year because they have fast economic growth, low debt relative to gross domestic product and high foreign-exchange reserves.”

This seems consistent with his 2014 forecast at the start of the year where he wrote at his Franklin Templeton blog:

As long-term fundamental investors, we do not make short-term predictions for share prices, but we believe longer-term developments that look likely to gain traction in 2014 could drive solid growth potential in many emerging economies.

Pardon me, but based on the above accounts, I interpret Mr. Mobius’ most recent stance as a drastic U-turn.

Has he come to the realization that the standard sloganeering of “fast economic growth, low debt relative to gross domestic product and high foreign-exchange reserves” barely serve as effective antidotes to the current selloff? Or has he come to realize that the supposed advantage of EM are really defective metrics which is why there has been sustained outflows?

Yet it’s odd for people who love to chatter about “long term” seem to fail to understand that “Long term is a product of accumulated short term activities”. This is best epitomized by a popular aphorism from Chinese philosopher Laozi’s “Journey of a thousand miles begins with a single step”. 

Long term outcomes are hardly ever linear. They are dependent on the course of people’s present actions.

Take for instance if Mr. Mobius’ epiphany is correct and outflows continue, what happens if these outflows would lead many EMs to suffer a crisis?  

What will be the respective reactions by each of the affected government of EM nations?

Will they apply more political actions as therapy? Will they resort to capital controls? Will they ballout affected sectors? How will they finance these? By indulging in massive monetary inflation or by raising taxes steeply or (updated to add) by deposit bail-in haircuts? Will protectionism rear its ugly head?

Or will they apply less political actions? What if some governments resort to the following unpopular measures such as allow banks to fail, allow debt defaults, reduce taxes, and or undertake market economy reforms? 

The conflicting actions above will have different impacts to the economic environment for each EM nation. Which of the two environment would be bullish post-crisis?

The point is, to repeat, the long horizon strictly depends on accrued short term actions of society such that an overhaul of the present template of activities will lead to vastly different long term outcomes. 

This also means that "outflows" have not been anomalies or reflective of investor irrationality (as popularly alleged) but instead a manifestation of the evolving dramatic changes in 'fundamentals' in response to earlier easy money conditions. 

"Outflows" are essentially symptoms of the boom-bust cycle.

Will Derivatives Cause the Next Financial Crisis?

So predicts investing guru Mark Mobius

According to this Bloomberg report,

Mark Mobius, executive chairman of Templeton Asset Management’s emerging markets group, said another financial crisis is inevitable because the causes of the previous one haven’t been resolved.

“There is definitely going to be another financial crisis around the corner because we haven’t solved any of the things that caused the previous crisis,” Mobius said at the Foreign Correspondents’ Club of Japan in Tokyo today in response to a question about price swings. “Are the derivatives regulated? No. Are you still getting growth in derivatives? Yes.”

The total value of derivatives in the world exceeds total global gross domestic product by a factor of 10, said Mobius, who oversees more than $50 billion. With that volume of bets in different directions, volatility and equity market crises will occur, he said.

The global financial crisis three years ago was caused in part by the proliferation of derivative products tied to U.S. home loans that ceased performing, triggering hundreds of billions of dollars in writedowns and leading to the collapse of Lehman Brothers Holdings Inc. in September 2008. The MSCI AC World Index of developed and emerging market stocks tumbled 46 percent between Lehman’s downfall and the market bottom on March 9, 2009.

A financial crisis may be around the corner, but I highly doubt if derivatives will be the principal cause of it.

Derivatives were symptoms of the 2008 crisis rather than the cause. A bubble in the US housing prices had been pricked by rising interest rates which eventually got vented on the marketplace, part of which had been seen on derivatives.

Prescribing regulations, which for some function as an elixir, seems oversimplistic and naïve.

Regulators and the markets have played a perpetual cat and mouse game. Regulators usually apply regulations premised on the past events and markets usually find ways to circumvent them. Eventually fueled by monetary inflation, such loopholes become conduits for the next bubble. So regulations would look like the whack-a-mole game. Regulators hit the moles only as they appear.

And as pointed in the post below, regulations and complex relationships between politically privileged groups and regulators functioned as main causes to the last US mortgage crisis. History may rhyme but not necessarily repeat. Players and markets involved may be different, but principle will be the same. Bubble cycles from inflationism.

Besides, regulators are people too and so with market participants. While both may differ in their respective operating incentives, shared relationships and interactions will cause difficulties in the administration or implementation of regulations. Not even a total ban on derivatives will erase or reduce the risks of another financial crisis caused by inflationism. That would be barking on the wrong tree.

Quote Of The Day: Market Oriented Principles Makes The Difference

That's the key criteria in selecting emerging markets, according to Templeton's chief honcho Mark Mobius, on his latest outlook, Spotlight on Southeast Asia.

His article dwells on the situation in Vietnam.

Mr. Mobius writes, (bold emphasis and italics mine)

``The big question in Vietnam remains whether the Communist government is willing to adopt a market-oriented economic model as China’s communist government had done. Lenin’s statue is still standing in Hanoi. However, more and more leaders from the market-driven and commercially oriented southern region of the country have been joining the government and influencing economic policies. In addition, many young Vietnamese who have lived, worked and studied overseas are returning home to help build up its economy and participate in the anticipated high growth in that country.

``It is important for the Vietnamese government to focus on broadening the privatization process in the economy. In this way, they can reap the potential benefits of privatization, just like other countries that have adopted similar market-oriented principles. One of Vietnam’s strengths is her people – a hardworking and ambitious local population coupled with a large population living overseas, the “viet kieu”, who are capable of contributing know-how and capital to grow the country at a faster pace."

Emerging markets aren't equal. The difference lies in the political economic trends towards market-oriented principles or free(r) markets.

Mark Mobius On The Chinese Yuan (Renmimbi)

Here is Templeton's Mark Mobius view on the Yuan, (bold highlights mine)

``We look at all currencies on the basis of purchasing power parity (i.e. comparisons of different inflation rates) and, of course, any controls and influences imposed by the central bank of each country. We then try to asses whether a currency is over or undervalued, how devaluation or revaluation may impact a specific currency, and then gauge the potential impact of such currency characteristics on the business of each company. For example, for an export-oriented company, a devaluation of its operating currency could be positive because it may be able to export more aggressively and more profitably, while the opposite could be true for an import-oriented company.

``Our purchasing power parity studies indicate that China’s currency, the renminbi, is actually close to fair value against the U.S. dollar at this stage. Judging from past experience, we believe that China is unlikely to act quickly on currency adjustments because they are afraid of the consequences of such volatility.

``The Chinese Central Bank Governor, Zhou Xiaochuan, hinted in March that the renminbi might be allowed to rise once the global economy recovered. However, the Commerce Ministry and others protective of Chinese exporters expressed opposition to a rise in the renminbi, as exporters saw shipments fall early in 2009 for the first time since China began opening trade in the late 1970s.

``As we see it, Chinese exporters have plenty of orders and Chinese companies are even stockpiling commodities such as crude oil, various metals, and grains, as a hedge against what appears to be rising inflation. Wages are moving up – in the export provinces of coastal China, for example, wages were raised by about 20% recently in an attempt to attract more workers from the interior.

``If the renminbi appreciates, that could mean losses in China’s vast foreign reserves, which would fall in renminbi terms. Meanwhile, the Chinese are addressing the depreciation of the U.S. dollar with a diversification of their foreign reserves into other currencies and a move to higher interest rate securities compared to low-interest U.S. Treasuries.

``The purchasing and storing of commodities is another way for China to conserve its value of foreign exchange reserves in an environment of a depreciating U.S. dollar. While statistics on commodity inventory levels in China may not be reliable or fully disclosed, our current information indicates that China’s commodity inventory levels are high. The Chinese favor commodities knowing that they will eventually be used, and also because they are concerned, given high and increasing demand, that commodity prices could rise further. A possible course of action could be to revalue the renminbi upwards so commodities would be cheaper in renminbi terms and wage demands could more easily be met. But with nationalist emotions rising, that course is probably closed."

Based on Mr. Mobius' account of China's forex management, China seems to be acting on her perceived changes in the exchange value of money of her currency relative to other currencies by diversification through higher yields of ex-US dollar instruments and importantly through massive stockpiling of commodities.

In the words of Ludwig von Mises,

``He who believes that the prices of the goods in which he takes an interest will rise, buys more of them than he would have bought in the absence of this belief: accordingly he restricts his cash holding. He who believes that prices will drop, restricts his purchases and thus enlarges his cash holding. As long as such speculative anticipations are limited to some commodities, they do not bring about a general tendency toward changes in cash holding. But it is different if people believe that they are on the eve of big cash-induced changes in purchasing power. When they expect that the money prices of all goods will rise or fall, they expand or restrict their purchases. These attitudes strengthen and accelerate the expected tendencies considerably. This goes on until the point is reached beyond which no further changes in the purchasing power of money are expected. Only then does this inclination to buy or to sell stop and do people begin again to increase or to decrease their cash holdings."

So it's not just the public acting to safeguard money as a store of value, even China seems aware of the endemic propensity by her trading partners to engage in inflationism thereby seek alternative havens.

In short, these are simply manifestations of the ongoing global monetary disorders, which I expect to worsen overtime.

Quote of the Day: Mark Mobius On Shareholder Activism

Words of wisdom from Templeton's chief honcho, Mark Mobius, (bold highlights mine)

``Shareholder activism is not a privilege – it is a right and a responsibility. When we invest in a company, we own part of that company and we are partly responsible for how that company progresses. If we believe there is something going wrong with the company, then we, as shareholders, must become active and vocal.

``However, most minority shareholders tend not to be very active. One of the biggest reasons for their reluctance is that it can take a lot of time and effort, and sometimes money too, to persuade management to change. To become a strong activist, one may need to hire lawyers, which could become quite expensive. Shareholders often find that it is much easier to simply sell their position in a company that they feel is going in the wrong direction. If enough shareholders sell out, and the share price drops, the company’s management may realize that their actions are not welcomed by the market, and they may retrace these actions. However, even if a share sell-off engenders change (which itself is unlikely), the change usually comes too late for those shareholders that have already sold out. In the long term, trading in and out of a company’s shares could present a costlier and more time-consuming strategy than simply exercising your rights as a shareholder.

``We pursue shareholder activism in varying degrees of intensity. Our initial step is usually to communicate with the company’s management and directors to express our concerns and begin a dialogue. Often, that is enough. If that does not work, then more aggressive action, such as voting out the directors, may be needed. However, the latter requires many investors to get together and express the same concerns. Deciding when and if we might consider taking a shareholder activist position must be carefully weighed against how much we have invested in the company and whether we think taking aggressive action has a good chance of success to warrant the necessary time and money involved."

In my view, shareholder activism is one great way to professionalize the equity markets. Ideally, this should lead to more investment flows and a longer term orientation for stakeholders. However, other forces such as inflationism tend to distort the way investors make decisions based on false signals. Nevertheless, shareholder activism is a bottom-approach in dealing with the development of the local equity markets.

Mark Mobius' Top 10 Emerging Markets

Here is Mark Mobius' roster of top 10 emerging market investment destinations.

From Timesonline,

1) Brazil

“It’s gone through an incredible transformation under President Lula. The resources sector is pretty important and there is also an active consumer sector. A number of banks also look interesting prospects right now.”

2) China

“This is the world’s fastest growing major economy and a big rise in per capita income is fuelling demand for consumer products such as cars.”

3) India

“This is the second fastest growing major economy. India is one of the most important commodity producers, especially of minerals such as iron ore. Its educated workforce is also a strong plus point and they have helped create many software consulting companies.”

4) Thailand

"The country has been handicapped by political concerns but a consumer revolution is now taking place. The banking system is ripe for growth and there are oil and gas deposits in the Gulf of Siam.”

5) Russia

“Russia has huge natural resources, including oil and gas but also nickel and palladium, which are much in demand. The Russians also possess considerable technological skills, thanks to their education system.”

6) Turkey

“This has been a favourite of mine for some time. I like the entrepreneurial spirit of the people and we have invested in banks and petroleum retailers.”

7) South Korea

“It has recently recovered from a dip and is beginning to come up again. We like the construction sector and the energy sector.”

8) Indonesia

“At 237 million Indonesia has a bigger population than eaither Russia or Brazil. It is a huge potential consumer market which we are keen to tap into.”

9) South Africa

“It has lots of problems but it also has some very attractive companies, such as Anglo American, the mining company. South Africa is a good way of obtaining exposure to the mining sector.”

10) Singapore

“This is an attractive place to do business and it has one company that we especially like: Dairy Farms South Asia, which has spread out from farming into retailing and food production across southern Asia.”

My comment:

If Templeton chief and market savant Mark Mobius lists the Philippine neighbors as major investment destinations, then this is likely to be a rising tide lift regional boats phenomenon. Oh yes I admit the guilt for using the fallacy of association (region) and cognitive bias called comfort of the crowds (neighbors)-although increasing regionalization should a key driving force for this.

Mark Mobius On Russia's Stock Market: Significant Upside Potential And Remains An Attractive Investment Destination

Emerging Market Guru Mark Mobius of Templeton Funds features Russia in his latest commentary...(bold highlights mine)

``During 2008, Russia was among the weakest stock market performers in the emerging market universe, losing more than 70% in US$ terms. But this year, the market has staged an impressive rally surging nearly 100% in the year-to-October period. The Russian market is among the cheapest in the emerging market universe and is trading at a discount of around 50% to its counterparts.

``Today, Russia and many other emerging markets are now being driven by an excess in money supply in the international markets which means that these markets are experiencing an inflow of money for investments. Consequently, as Russia was more depressed than other markets, the upside is greater. At Templeton, we continue to find attractive opportunities in most sectors despite the recent rally as valuations remain undervalued. The Templeton Emerging Markets team continues to study individual companies and maintain a long-term investment outlook. Of course general factors such as trends in regional consumer expenditure, commodity prices and corporate governance policies are also taken into account.

We believe that Russia’s equity markets are poised to climb significantly higher because even among Russia’s blue chips you can still find undervalued stocks relative to global and sector peers. Take for example, Gazprom and Lukoil. Gazprom is the largest producer of gas in the world by reserves and production. The company’s reserves account for nearly a fifth of the world’s supply. It is also the biggest gas supplier to Europe and makes up for a majority of the gas production in Russia. Its valuations, however, remain extremely attractive with a P/E of just 4.5x and P/BV of 0.9x.

Lukoil is the second largest vertically integrated oil company in Russia and one of the largest in the world in terms of reserves. The company is engaged in exploration, development, production and refining of crude oil and marketing and distribution of crude and oil products. Lukoil is also trading at very attractive valuations with a P/E of 5.3x and P/BV of 1.0x.

However, there are still risks involved with Russia. The short-term risk is a downturn in money supply and a political event which could impact market sentiment while in the longer-term, it is a change in government attitudes towards privatisation and a market economy.

There are some sectors that we prefer over others within Russia. At the moment we like commodities and in particular the oil companies. We also like consumer sector given that it is a growing market in Russia. In particular we are finding good value in consumer products and distribution companies.

In general, our long-term outlook for Russia remains positive. The country has the world’s third largest foreign exchange reserves at more than US$400 billion. Meanwhile, inflation has been trending down and due to timely and adequate support from the government to the domestic banking system, a new equilibrium for the Ruble has been established. As a result, the authorities were able to cut interest rates. Moreover, Russia owns large proportion of the world’s natural resources and many of the country’s commodity companies are among the world’s low-cost producers.

``Last but not least, it is interesting to note that based on current valuations, the Russian market is among the cheapest in the emerging market universe. With Price to Earnings (P/E) of just 9.8x and a Price to Book Value (P/BV) of just 1.2x, the Russian market is trading at a discount of about 50% to its emerging market counterparts. This gap should eventually narrow, which is why we believe that Russia could outperform its emerging market peers in the future. In addition, Russia is also trading at a discount to its BRIC peers (as represented by the MSCI BRIC index), which have a P/E of 15.8x and P/BV of 2.2x. Thus, the Russian market has significant upside potential and remains an attractive investment destination."

Mark Mobius: The Stock Market Rally In Emerging Markets Has Legs

The UK's Telegraph interviews Templeton's Mark Mobius who says that emerging markets stocks will continue to rally.

This from the Business Insider,

``Templeton's Mark Mobius argues that the global rally still has legs. This is partly due to massive liquidity being created globally, via both government policy and derivatives.

``Moreover, Investors shouldn't time, nor flee from, any potential corrections along the way. More nerves of steel from the emerging markets perma-bull:

"Money supply is growing at a rapid pace, globally."

"Derivatives are not dead. There's $600 trillion dollars worth of derivatives out there."

"As you know, there are always corrections in a bull market. And the corrections can be very violent, and big... nobody knows when. And if you think that you're gonna catch it, forget it, because these things move very, very fast."

In short, guru Mark Mobius sees emerging markets in a secular bullmarket from which market "timing" could result to lost opportunities.

Watch video below

Mark Mobius: Expect Market Volatility, But Capitalize On The Opportunity

From Franklin Templeton's July Emerging Markets Review

Feature of the Month: Q&A on Emerging Markets with Mark Mobius, Executive Chairman, Templeton Asset Management Ltd. (red highlights mine)

Is the recent rally in emerging market equities sustainable?

Although we are optimistic about the markets’ upside potential, it is important to realize that volatility is still with us and will be with us for a while. This means that there will be down markets as well as up markets. We therefore must pay attention to valuations and long-term earnings growth prospects in order to avoid buying or holding expensive stocks as a result of dramatic price rises that we have seen. Current valuations are below the five-year high valuations and thus are not excessive.

Emerging market equity funds resumed net inflows, recording a record $26.5 billion of investment in the 2nd quarter. Do you think emerging markets will continue to attract inflows?

In general, we expect inflows to continue, however, there could also be some volatility. We cannot expect to see net inflows every month or every week, but in general the trend should be positive. In the first seven months of 2009, net inflows (using weekly data from www.emergingportfolio.com) totaled US$34.5 billion. This is more than 85% of the approximate US$40 billion in outflows in 2008.

What are the reasons?

A return of confidence in emerging markets, the desire for higher returns, an increase in investor risk appetite, the search for undervalued companies and most importantly, attractive valuations in emerging market companies drove the inflows.

Within the emerging markets universe, where do you see the most attractive opportunities at this juncture?

Since it’s usually possible to find at least a few bargains in most markets, all emerging market regions are looking exciting. Currently, our largest exposures are to Brazil, Russia, China, India and South Africa. In terms of sectors, commodity stocks also look good because some of them have declined significantly below their intrinsic worth and we expect the global demand for commodities to continue its long-term growth. Consumer stocks are also favored. With rising per capita income and strong demand for consumer and other goods, the earnings growth outlook for these stocks is positive.

The World Bank recently said that reduced capital inflows from exports, remittances and foreign direct investment means “increasingly grave economic prospects” for developing nations. Do you share the view and is it something to worry about?

The World Bank is normally "behind the curve" when it comes to economic projections. Economists tend to look through the rear view mirror and not ahead. While reduced capital inflows from exports, remittances and foreign direct investment could have a negative impact on emerging markets, we can expect to see increased inflows resulting from consumer and infrastructure spending growth compensate for this. This could allow markets to record positive economic growth. This is especially the case in markets such as China and India.

Are you still optimistic about Asia ex-Japan? Which markets are you most positive about?

Yes, Asia is the largest emerging market region in the world. Asian countries are also growing relatively fast. They include countries like China and India with very large populations whose per capita income is growing, and capital markets in those countries are undergoing rapid development. Economic growth remains relatively high, per capita incomes have been rising, valuations remain attractive and reforms continue, thus improving the region’s business and investment environment. Our largest exposures are to China, India, South Korea and Thailand.

What are your views on the BRICs bloc? Is it a good investment proposition?

Yes, we remain optimistic about the long-term future of the BRIC markets. The BRIC countries are among the fastest growing economies in the world. Moreover, foreign exchange reserves in all four countries remain high. The four markets together account for more than 40% of the world population. Domestic demand growth also remains robust. China and India continue to register significant positive GDP growth rates in spite of the global slowdown China continues to take great strides towards becoming a major global player. The Chinese economy is expected to grow about 8% in 2009 and its foreign reserves have surpassed US$2 trillion. Moreover, Brazil and Russia are resource rich countries and although commodity prices have declined from their peak, the longer trend for commodity prices is up and these countries will benefit from global demand for oil, steel, aluminum, pulp, and other commodities.

Commodity prices have rebounded strongly and this has augured well for emerging markets. What are your views on commodities going forward?

The outlook for commodities remains positive. Strong demand from emerging markets coupled a more inelastic supply could lead to higher prices in the future. In general, we expect commodity prices to maintain a long-term uptrend. However, this will not be without corrections along the way. A number of emerging markets are major suppliers of various commodities as well as big consumers. For example, Brazil is one of the world's largest suppliers of iron ore, Russia is the largest supplier of natural gas, and so forth. Also, since emerging markets have the most people in the world the potential demand for commodities in those countries is also great. It is no surprise therefore that interest in such commodities is important..

I'd like to add that Dr. Mobius recently reemphasized the volatility factor.

According to Bloomberg (bold highlights mine), “When you have these rapid increases, almost without correction, you will definitely have a correction at some point, so we can expect a lot of volatility,” Mobius, the executive chairman of Templeton Asset Management Ltd., said in an interview in Kuala Lumpur today. “Increases of 70 percent can be followed by decreases of 20 to 30 percent.”

The so-called correction “can happen anytime, probably this year,” Mobius said. “It may not be all at once, you may not see a decrease of 20 percent suddenly, it could be 10 percent here, and a rise of 5 percent then another 10 percent, you’ll see this kind of volatility in the markets.” He added that he was referring to shares “globally.”

Nonetheless he would use the correction to add positions...

Again from Bloomberg, ``The biggest risk for global stocks is the increase in initial share sales and bond issues, Mobius said today. Investors will be “selling to take up new stocks, that will impact the prices,” he said. Mobius, who oversees about $25 billion, on July 29 said he plans to double Templeton Asset Management’s emerging-market assets within two years."

Since he doesn't think its a bubble...

Again from Bloomberg, “I don’t think it’s a bubble” because “you don’t have the irrational exuberance so to speak that you would normally find in a bubble activity,” Mobius said. The government’s policies to rein in bank lending are a “good thing,” he said.

Mark Mobius: The Most Important Lesson Is To Be Patient

From Franklin Templeton's monthly Emerging Markets Review

Feature of the Month: Q&A on Emerging Markets with Mark Mobius, Executive Chairman, Templeton Asset Management Ltd. (red highlight mine)

Emerging markets have been outperforming thus far in 2009, do you think this trend will continue for the rest of the year?

Although we are optimistic about the opportunities for upside potential, it is important to realize the volatility is still with us and will be with us for some time. This means that there will be periods when the markets go down as well as periods when they go up. We should therefore take advantage of dips in the markets to buy stocks cheaply, paying attention to valuations and long-term earnings growth prospects in order to avoid buying or holding expensive stocks. We continue to find good value in markets like China, Thailand, Brazil, Mexico, Turkey and South Africa.

What sectors are you looking at now?

Commodity stocks look attractive because many of them have declined below their intrinsic value and we expect the global demand for commodities to continue its long-term growth. Consumer stocks also look attractive. With rising per capita income and strong demand for consumer and other goods, the earnings growth outlook for these stocks is positive.

Will the global equity market retest the low point in March?

There is always the possibility of this happening and it could be triggered by something totally unexpected, such as war breaking out on the Korean peninsula or a massive global flu pandemic. As I have said, markets will continue to be volatile as global economies remain fragile and we should see rises and falls in the months ahead.

Which country do you expect to be the best performer from the BRIC markets?

That would be impossible to say at this time but we think China has a good chance of achieving that goal. Of course, I'm talking about measuring that move from the beginning of this year. Russia also looks very undervalued.

In view of China’s strong market performance, would you say that it’s in a bull market?

You can see that it is a bull market since the increase has been so dramatic but it would be difficult to call it a sustainable bull market in view of its very sharp rise. I still feel that we will face volatility and there will be corrections along the say. We, do however, expect China to continue to take lead the global market recovery.

Will the Chinese government propose another stimulus package in 2009? Why?

That all depends on the success of the measures already in place. They clearly have the resources to do this again. We should expect them to act if current measures and programs do not give the desired results.

You mentioned in October that Russia's cheap stocks were an once-in-a-lifetime opportunity. Since then, the RTS Index in Russia fell a bit more to 498, then subsequently doubled this year. After that great performance, are stocks still a good value, or is it time to take a breather?

Russian stocks still look cheap. Yes, they have risen dramatically from their low point but they are still a long way from their previous high. Of course, the P/E has risen this year but Russian stocks, as represented by the MSCI Russia index, are still trading at a single-digit P/E of 6.8x as of end-May, 2009, an increase from an even lower 3.4x as of end-December 2008.

Do the economic problems within Russia--unemployment rising to 10 percent, inflation at 13 percent, and possible GDP contraction of 6 percent--undermine the investment case for the country right now?

These factors will have a short-term impact on the market, but we always evaluate companies on a long-term basis – taking a five-year view. Thus, we are in fact able to benefit from buying stocks at cheaper prices now.

Do you see any parallels between the market crash in Russia of 1998 and the one over the last year? Is there fear focused on this market that leads to sharper crashes than elsewhere? Did you learn anything in 1998 about Russia that helped you navigate this crisis?

No, because Russia and most other markets are in a much stronger position, financially and economically, than they were in 1998. Russia built up strong foreign exchange reserves and trade surplus which has enabled it to withstand external shocks to its economy.

The Russian market was also affected by the correction in commodity prices due to its high exports of oil and other commodities, as opposed to any extraordinary fear focused on this market. However, we maintain the view that commodity prices will continue to increase in the long-term due to greater demand from emerging markets and a relatively inelastic supply. This shall, thus, benefit Russia in the future.

The most important lesson we’ve learnt from 1998 or any other crisis is that markets always recover - it’s just a matter of time. Thus, one should always maintain a long-term and patient view to investing.

Lastly, you have been investing in the emerging markets for the last 4 decades. Being an expert in investing in emerging markets, do you have any advice to share with investors during the recent market situation?

It is very important for investors to remember some key principles: (1) diversify - it is important to diversify in order to minimize risk - this is why investing in a diversified mutual fund is best for investors, (2) look globally - no country has a monopoly on good opportunities so you must search globally - this is why we have global emerging market funds, (3) be patient - don't expect to obtain quick gains - the long term investors do best, (4) don't invest unless you understand the investment your are making - understanding will strengthen your confidence and enable you to make long term investments.

Mark Mobius Latest Outlook on Emerging Markets

Templeton's Mark Mobius gives us why he's bullish with Emerging Markets.

This from Franklin Templeton's April Outlook

Q&A on Emerging Markets with Mark Mobius

What's your assessment of the global economy?

The global economy is in a situation where individuals, companies and economies are in a strong position to overcome the global crisis with support from their governments and central banks. We also believe that emerging markets will play a much greater role in the global economy. Countries such as China and India are expected to emerge as leaders due to their relatively stronger macroeconomic and financial positions.

In which regions are you most optimistic about investment opportunities?

Since it’s usually possible to find at least a few bargains in most markets, all emerging market regions are looking exciting; this is especially the case now, in view of the recent corrections. While global growth has slowed, emerging markets are still expected to grow at a much faster rate than developed markets. The accumulation of foreign exchange reserves also puts emerging economies in a much stronger position to weather external shocks with reserves, for example, in China, totaling nearly US$2 trillion. More importantly, for us as value investors, the current valuations of emerging markets are attractive. Certain countries such as Turkey and Russia are now trading at single-digit price to earnings ratios.

Asia is the largest emerging market region in the world. Asian countries are also growing relatively fast. They include countries like China and India with very large populations whose per capita income is growing, and capital markets in those countries are undergoing rapid development. Economic growth remains relatively high, per capita incomes have been rising, valuations remain attractive and reforms continue, thus improving the region’s business and investment environment.

Valuations in Eastern European markets are also attractive, very attractive in some markets such as Hungary and Turkey which are trading at low single-digit P/Es. Poland is one of the few countries in the region that is expected to record positive GDP growth in 2009. Its valuations are, however, are not as attractive as some of its regional peers. Russia is another interesting market. With its huge land mass, large population and abundant natural resources, the country could become one of the fastest-developing economies in the longer-term.

Most Latin American economies are faring relatively well taking into account the current global macroeconomic conditions. There are selective countries which are more prone to the global downturn. For example, Mexico, but greater inter-regional trade has offset some of the adverse impact of lower export demand from the U.S. One of the region's main attractions is its huge consumer market with pent-up demand for goods and services and world-class companies that are at the same time under-leveraged and inexpensive. In addition, the region’s natural resources are among the largest in the world. Countries such as Chile and Peru which are among the world’s leading copper producers. Mexico is a net exporter of oil. Brazil is a major exporter of iron ore, and soft commodities such as soybeans and coffee as well. Colombia is also exports commodities such as oil, coffee, coal, and so on. While commodity stocks have been negatively affected by the recent decline in commodity prices, many companies are still profitable at current price levels.

In addition, frontier markets, which are the emerging markets of the future, are starting to look interesting. For example, the Middle East is of great interest and we believe the potential for economic growth and development remains considerable, especially if the current trend toward the implementation of political and economic reforms remains on course. Africa is another area we’re excited about. In addition to South Africa, regional economies are also beginning to look attractive.

In your opinion, what are the biggest threats to the global economy?

- loss of confidence
- excessive or poor regulation
- adoption of protectionist measures
- abandonment of the market economy philosophy

Why are you so positive about the outlook for emerging markets?

One key reason is the rapid growth of money supply, not only in the U.S. but all over the world. Governments are trying their best to avoid deflation by pumping money into the economic system. This money must find a home and current savings interest rates, for example, for the US dollar, is not very warm and cozy. Investors have already begun to show renewed confidence and are seeking better returns. The obvious choice is equities. (italics added)

Specifically for emerging markets, we are optimistic because emerging markets:

- are undervalued, trading at extremely attractive valuations and have strong fundamentals
- have undervalued domestic currencies
- are expected to grow, in aggregate, faster than the developed countries
- will emerge as leaders due to their relatively stronger macroeconomic and financial positions.
- have strong holdings of foreign reserves, allowing them to better withstand any external shocks
- follow prudent fiscal policies
- have expanding trade and economic relations with each other; lowering their dependence on developed markets
- represent a huge consumer market as well as a large labor force
- have abundant natural reserves in countries such as Russia, Brazil and South Africa
- have strong potential for development in areas such as infrastructure

Emerging Markets Stocks Reveals Deep Value

The rapid selloff in the global markets has led to massive adjustments in corporate valuations in emerging markets.

What used to be deemed as "pricey" has now turned to near "fire sale" prices.

According to Jack Dzierwa, Global Strategist of US Global Investors (emphasis mine),

``First, as we’ve said earlier, it’s important to not lose sight of fundamentals, which in the long run will be the driving force in the markets. In terms of valuations, the trailing price-to-earnings ratio hit an all-time low of 6.5x in mid-October, with an equity risk premium of 1,100 basis points.

``It is likely that investors are noticing these compelling valuations, as in the last two weeks higher stock prices in the emerging markets universe have driven trailing P/E up to 8.2x. While these P/Es have risen, emerging markets are still trading at a 27 percent discount to the developed markets universe.

Current valuations represent signs of morbid fear than of reality.

As of last week, the Philippine benchmark, the Phisix, according to the table below from David Fuller of fullermoney.com (HT: Prieur Du Plessis) shows dividend yields at 6.36%, PE at 9.05 and P/B at 1.4., compared to Indonesia’s 5.31%, 7.11 and 1.5, while Malaysia 6.15%, 9.67 and 1.3.

From current depressed levels, it is without doubt why Templeton's Mark Mobius believes that ``I think the markets will rejuvenate much faster than many people realize"

I share his view.