By James Phillipps Emerging markets are starting to break from their correlation with the Nasdaq ...
By James Phillipps
Emerging markets are starting to break from their correlation with the Nasdaq and outperform of developed countries, according to Mark Mobius, head of emerging markets at Franklin Templeton Investments.
Mobius said: "Emerging markets have been moving exactly in line with the Nasdaq but that is over, they are separating out from the Nasdaq and will mainly outperform.
"It is a cause of concern that people have been using the Nasdaq as a proxy for emerging markets, because the negative sentiment for that market impacted on the emerging markets."
Mobius argued that concerns about a global slowdown are overblown and he predicts global economic growth of 4% this year.
Mobius believes emerging markets will outperform their developed counterparts, benefiting from rapidly falling interest rates and undervalued currencies. Following net outflows from emerging markets year to date, he believes it will only take relatively small levels of cash inflows to lift liquidity and drive recovery.
"These markets have been scraping the bottom for a long time and it will only take small amounts of new money to make a big difference, he said.
"Interest rates are falling like a stone in emerging markets countries making it easier for them to pay off their debts and undervalued currencies will enable them to be more competitive in foreign trade and will help their balance of payments."
The weakening dependence on the US market will benefit emerging market companies, in what will be largely an export-led recovery.
"We will also see less and less dependence on one market, such as the US. If the Chinese economy continues to grow at 7-8% it is going to become a big factor in world trade and the same is true of Brazil," he said.
Given the negative sentiment for private equity and concerns about hedge funds, Mobius believes US pension fund managers will look to emerging markets as they seek diversification. Mobius also believes advances are being made in the area of corporate governance and praised the hard line taken by the Bush administration with such bodies as the International Monetary Fund (IMF) and the European Bank of Reconstruction and Development (EBRD).
He said: "We are very happy to see the US administration saying 'reform before money' to the IMF. In some cases conglomerates have aided and abetted bad corporate governance and the EBRD has been particularly bad."
In an attempt to influence corporate governance directly, Mobius said he was now focusing on taking larger stakes in fewer companies, so he could place one of his team on the board of directors or partnering with other companies to take control of the investment completely.
His largest country weightings, at 14% is currently in South Africa, where he believes good companies can be bought at a discount, although there are widespread liquidity problems. "The largest component in our portfolio is South Africa. We are buying first world companies at third world prices.
"There is a perception that South Africa is a dangerous, Aids and crime infested country," he said.
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