As a result of the events in 2001, there could be increased near-term volatility in global financial...
As a result of the events in 2001, there could be increased near-term volatility in global financial markets. There is also an increased risk of a global recession in the face of questionable US growth and a deteriorating situation in Japan.
However, growth rates in emerging markets remain generally twice that of developed countries or are decelerating at slower rates than developed countries. Many financial markets in emerging markets have also fallen, or are close to historically low levels, resulting in attractive entry points for well managed businesses.
In addition, we see that progressive political changes which lead to efficient and strong central governments could, in turn, attract foreign investment.
With corporate governance gaining recognition in more emerging markets, companies and markets that recognise the importance of respecting and protecting minority shareholders could find greater inflows of funds coming their way.
We believe the current prices of emerging markets stocks do not represent their intrinsic values. In many cases, we are buying assets at a fraction of their replacement values. Such a situation cannot persist for long. Most, if not all, of the bad news has been discounted. Taking a long-term view, the emerging markets story is intact.
Countries such as China and India will continue to grow at significantly higher rates than developed countries such as the US, Japan and the UK. Within a decade, these countries could evolve into global economic powers, and we expect stock prices in these countries to reflect this growth.
Q. Will the markets' rally continue?
A. If you look at the markets' historical lows, then there is plenty of upside still to go.
For example, look at Thailand. After the Asian financial crisis in 1997/8, the Thai market fell to a low in August 1998, losing some 90%. The market capitalisation of the stock market has fallen from about US$130bn in 1993 to about US$30bn as of the end of October 2001. For the market to reach its peak as experienced at the end of 1993, it would have to gain some 970%.
Q. When do you think the global economy is going to pick up?
A. From the present perspective, the global economy has been on the mend and is beginning to pick up in view of two very important characteristics: low interest rates and low commodity prices. It would be impossible to predict market recovery. After all, look at what was being predicted prior to the September 11 attacks. One can never predict the exact timing of future events. There will always be uncertainties and events which cause markets to fall as well as rise. As investors, we can best conduct due diligence and research to reduce risks and avoid investing in stocks that are trading at excessive valuations.
Q. What specific regions look the most attractive and why?
A. Keeping in mind that we find good companies in all markets, countries which feature most positively include South Africa, Indonesia, Thailand, Taiwan, Mexico and South Korea. South Africa has excellent companies going at cheap prices.
We are buying first-world companies at third-world prices. South Korea continues to exhibit positive growth compared to its regional counterparts. Good stocks with high technology are selling at low prices in Taiwan. Probably the best opportunities, but with the highest risk, are in Indonesia and Thailand. Stock prices have come down so low in both countries that they have discounted almost any political disaster.
Q. Now that China has joined the WTO, is it a good place to invest?
A. The outlook for China is bright. Despite global conditions, the International Monetary Fund expects China to grow 6.8% in 2002 as a result of continued government expenditures and sustained domestic demand buttressed by loose fiscal and monetary policies.
According to government estimates, China's successful bid to host the 2008 Olympic Games could add an average of 0.3% to 0.4% to its annual growth in the next seven years.
As a result of the World Trade Organisation (WTO), more multinational and private companies will have access to the market. Market regulations will be enhanced to meet international standards and be more market oriented rather than government oriented. Transparency and corporate governance should also improve. All this bodes well for investors.
Q. What regions should investors avoid and why?
A. We do not advocate avoiding countries or markets per se. Of course, there may be regions/countries that demand greater care and scrutiny, but we would not discriminate against any market as a whole. For example, uncertainty over the peace process in the Middle East and the weak technology sector continue to warrant greater care with regard to investments in Israel. But excellent management and low equity prices make Israel an appealing investment area.
In Asia, the corruption in the Philippines has reached such high levels, and protection for investors is so poor, the risks outweigh the potential rewards. So it is really a matter of balancing the risks with the rewards.
Dr J Mark Mobius is president of Templeton Emerging Markets Funds with responsibility for Templeton's emerging markets activity
The global economy is starting to pick up.
The emerging markets' rally looks set to continue
China is expected to grow 6.8% in 2002, boding well for investors.
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