Indiana Jones whips returns into shape

Plunging share prices during the East Asian crisis of 1997 to 1998 saw the average emerging markets fund lose 26 per cent in just one year. But the theme of investing in developing economies, against a background of rising prices of raw materials, is back with a vengeance.

Leading the renewed sales push, is the guru of the gurus, Mark Mobius, described variously as the Indiana Jones or the Yul Brynner of the emerging markets, for his swashbuckling approach. Dr Mobius started the emerging markets team at Franklin Templeton back in 1987 and now oversees $20bn (e16.76bn) of assets, split among 19 different funds. Today, he favours investments in the BRIC (Brazil, Russia, China, India) economies, for which there is also an increased hunger among Europe’s private banks and other distributors.

Templeton’s Global Emerging Markets fund typically holds 100-150 stocks, and so allows for a broad range of bets. But the BRIC countries currently account for 35 per cent of Dr Mobius’ assets under management. The high percentage is explained by the fact that he also runs specialist Latin American and Eastern European funds.

BRIC stocks are around 50 per cent cheaper than US shares on a price to earning basis, explains Dr Mobius. Although their domestic markets account for 52 per cent of the emerging markets’ total population, the stocks account for just 28 per cent of the $5.7bn total market capitalisation.

Assets in Templeton’s Asian growth fund have surged to $2.1bn from $100m in 1991. Strong recent performance of the fund, which has a third of its assets in Korea, is highlighted by total euro-based returns of 84 per cent over three years versus 57 per cent for the S&P sector average. The fund has 20 per cent exposure to energy, with Sinopec, the China National Petrochemical Corporation, accounting for seven per cent.

The $529m Templeton China fund, which has 40 per cent in Taiwan and Hong Kong, has also outperformed the S&P sector average over the last three years, returning 69 per cent against 62 per cent for the sector. Diversified financials, technology hardware/equipment and telecom services are the top industries, accounting for 40 per cent of its total assets. Dr Mobius believes the Chinese currency, the RMB, is undervalued by 18 per cent and the two Templeton funds are poised to benefit from its appreciation due to their high exposure to Asian exporters.

China’s slowdown

Dr Mobius says if there is a substantial slowdown in China, this will negatively impact surrounding countries. But he adds that “growth will continue and we will be happy with the five to six per cent growth rate because China is so big”.

Russia accounts for a quarter of the ?922m Templeton Eastern European fund, with Lukoil, Russia’s second oil and gas company the largest holding. Dr Mobius believes the Rouble is overvalued by 99 per cent.

“This overvaluation is true of all Eastern European countries, as inflows of funds are pushing prices up and the behaviour of central banks favours over-valuation,” he comments. This fund has nudged ahead of its three-year sector average, returning 183 per cent versus 179 per cent, although it has underperformed over the last 12 months.

Launched in 1996, Templeton’s $265m Latin American fund has more than 50 per cent in Brazil and over a third of assets in Mexico. Favoured sectors are food, beverages, tobacco and materials. Again, the 225 per cent three-year returns are better than the sector, while the 66 per cent one-year number dips below the average. Dr Mobius also expects Brazilian currency appreciation.

The question today is whether this emerging markets offering will do as well over the next three years it has over the past three.

If the current environment of high commodity prices and low inflation risk is favourable for emerging markets, the risk that high oil prices will have a negative impact on the growth and development of developing countries economies is looming. “This is especially relevant for Taiwan and Korea, as they are oil importers,” says Dr Mobius.

“However, there are at least three factors that can mitigate the impact of high oil prices on their economies. These countries have learnt from the last crisis how to cut costs. Their governments can reduce the tax level, which is very high at retail level, and, this way, reduce inflation. The third one is that countries like Taiwan have moved towards technology, now produce higher value added products and do not depend so much on consumer goods like before.”

There are also a number of other risks, believes Dr Mobius. “Political risk is the most important risk and is true for every emerging market, as the rule of law is not deeply embedded and the possibility of a regime change or a change in policy puts the economy and stocks at risk”.

Mobius: politics provides biggest risk