Two weeks ago, Dr Mark Mobius, executive chairman of Templeton Asset Management Ltd, said markets could decline between 20% and 30% following their recovery from last year’s rout. True enough, last week, stock markets across the globe saw a correction, with the Shanghai Composite Index losing 20% of its value gained since Aug 4, on Wednesday.

“There will be corrections along the way but you’ll have to expect that there could be as much as 20% to 30% decline. That’s natural in this kind of environment when you have very bullish attitudes and sentiment and lots of money coming into the market. And derivatives are very much alive; a lot of people are shorting the market. So, you’ve got to expect there’ll be corrections along the way,” Mobius explains.

With his base in Singapore and Hong Kong, Mobius manages US$25 billion (RM88 billion) for Templeton Asset Management, which is part of Franklin Resources Inc, a US-based global investment manager with US$421 billion in assets under its management. The Templeton Emerging Markets team, headed by Mobius, has 15 offices around the world, including Kuala Lumpur.

The investment guru says while the worst of the economic and financial crisis is over, investors can still expect a lot of volatility, given the extensive leveraging in the markets through the use of derivatives. But then again, volatility presents opportunities.

“Because when the market corrects downwards, it’s a great opportunity to be buying, if you’re brave enough,” Mobius says.

He blamed derivatives for the volatility in the market, calling them one of the “two elephants in the room”, in his presentation at the World Capital Markets Symposium held two weeks ago in Kuala Lumpur. He pointed out the massive losses suffered by companies as a result of derivative contracts.

The 72-year-old emerging markets pioneer has little confidence that lawmakers in Washington DC will be able to write new guidelines to regulate derivatives trading effectively.

“Any legislation will be very weak because the forces in Washington preventing strong regulation are powerful,” he tells The Edge.

This being the case, Mobius advocates transparency. 

“You’ve got to have transparency. If you are involved in derivatives, you have to reveal exactly what’s in the derivatives contract in simplified terms. Then, you’ve got to standardise the contract. The next step is to ensure it’s easily traded. You have transparency, understanding, standardisation and listing so that you can trade these derivatives and people can understand what their values are,” Mobius explains.

Having invested in emerging markets since the 1980s, when he joined Templeton to start and manage Templeton Emerging Markets Fund, Mobius says his current favourite emerging market is China. He also likes Indonesia but notes that corruption is a big problem there. He finds Sri Lanka an interesting market with the end of the civil war and sees opportunities in tourism and plantations. However, liquidity is a problem there, he adds.

In its latest update to investors, Templeton highlighted the two investment themes of commodities and consumer stocks for its funds and said values were surfacing in emerging markets, including Malaysia, where Mobius likes the plantation and banking sectors.

“We do believe palm oil prices will trend upwards in the long term. The other area is banking. We think some of the banks here are particularly strong; they’ve missed out the global banking problems and are very well capitalised,” he says, declining to specify any stock.

One of the stocks Templeton funds have held in the past is Maxis Communications Bhd. In early 2006, Maxis was one of Templeton Asian Growth Fund’s top 10 holdings. On Maxis going for a relisting this year — two years after it delisted — Mobius says he has no problem with that as long as there are transparency and disclosure in the process.

“This relates very much to the question of minority rights. One of the problems facing Malaysia and other countries around the world is protection of minority rights because if you don’t protect minority rights — and there have been a number of instances around the world, including Malaysia, where minorities were not treated fairly — you’ve got a real problem in attracting investors into the market, not just foreign but also local,” he adds.

Mobius says the protection of minority shareholder rights is a global issue and not limited to emerging markets or family-controlled companies.

“Obviously, whoever is controlling the company — be it a family or management — will try to make themselves rich before anybody else. If there’s no check, then they will do whatever they want. They’ll take advantage of minority shareholders. You see that anywhere in the world,” he says. 

On Maxis’ listing creating more depth and liquidity on the local bourse, Mobius says while it’s a good idea to have large companies with a global edge, it’s important that they are well managed, not just big.

“Generally speaking, it’s a good idea to have larger companies, particularly in telecommunications — anything that verges on utilities. We’ve invested in small companies as well but from a country’s point of view, it makes sense to create larger companies provided you have good management in there,” he explains. 

During the 1997/98 Asian financial crisis, Mobius was one of the outspoken critics of Malaysia’s capital controls, likening the restrictions on capital to a “theft of assets”. He has softened his tone on Malaysia these days and lauds Prime Minister Datuk Seri Najib Razak’s market liberalisation measures and efforts towards regional cooperation.

This article appeared in The Edge Malaysia, Issue 769, Aug 24-30, 2009.