Highly indebted countries such as brazil likely to do well in a low interest rate environment
A continued easing bias in US and European monetary policy has made Mark Mobius bullish on the outlook for emerging markets, as lower interest rates reduce the cost of repaying corporate debt.
In a low interest rate environment, Mobius, who runs the Templeton Emerging Markets investment trust, said highly indebted countries like Argentina and Brazil will perform well due to the reduction in their cost of debt.
Mobius believes debt valuations in emerging markets are currently attractive but there are significant risks from monetary tightening.
He said: 'We are close to the end of the outperformance of emerging market debt funds. There just needs to be an uptick in interest rates and there will be problems in this area.'
Mobius is more uniformly positive on the upside potential for emerging market equities, noting average annual GDP growth was 5.2% from 1994 to 2003, almost double that of developed markets, which averaged 2.7% over the same period.
Added to this, Mobius said, there is a weight of money coming into the sector from US institutions and individual investors who are switching out of the US.
Emerging market equities steadily outperformed the S&P 500 until the Mexican crisis in 1994, after which they began to underperform. However, since September 2001, the region has started to outperform again and Mobius believes this trend will continue going forward.
From a bottom-up perspective, areas of the market Mobius is particularly keen on at present are oil, gas, banks and consumer goods, all of which are doing well on the back of the recent economic recovery, he noted.
Within consumer goods, Mobius is particularly keen on beer stocks due to strong domestic demand. However, his focus on corporate governance means he will only invest in well managed companies.
Mobius, who runs a portfolio of roughly 150 stocks, has a universe of 15,000 companies, which are filtered through a host of databases and local offices. They are then screened using market capitalisation, liquidity and valuation factors to create a master list of investable stocks.
'We do our own analysis of all the screened companies, using our Oracle system, which looks at profit and loss statements, cashflow, management and the competitiveness of the company's product,' Mobius said. 'We also meet the companies to make sure nothing is hidden as it important to understand corporate governance.'
The selected companies are then compared to their global peers and the portfolio is constructed. Over one year, the Templeton Emerging Markets Trust is ranked first out of eight in the Global Emerging Markets sector, returning -6.8% on a mid-to-mid basis, compared to the sector average of -28.1%.
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