Friday 29 Mar 2024
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This article first appeared in The Edge Malaysia Weekly, on October 10 - 16, 2016.

 

Investors should examine the impact of the unsuccessful negative interest rate policies on their portfolios, says Mark Mobius, executive chairman of Templeton Emerging Markets Group.

“I think it might be an appropriate time to examine the consequences of unconventional monetary policy pursuits, particularly the negative interest rate policies. While the Federal Reserve policymakers recently indicated a negative rate policy is not a constructive option for the US right now, there is growing concern about the pursuit of negative interest rates by other central banks such as the Bank of Japan and European Central Bank,” he says. 

“The hope was that banks would also be encouraged to lend aggressively. But we haven’t really seen that either. As a result, the global economy is not roaring ahead despite the huge money-printing taking place and the extremely low interest rates in the major economies.”

But investors should not be paralysed by the situation and react by keeping their money out of assets. In doing so, the rising inflation in this environment will slowly erode the value of their wealth. Instead, they should remain invested, says Mobius.

“Many people who would normally deposit their money in the bank now simply keep their cash in safe deposit boxes or under the floorboards. The lack of interest earnings makes people who are not able to invest the money elsewhere feel that they are financially disadvantaged. This can actually do the opposite of what these efforts intend; they can prolong or exacerbate a growth slowdown in an economy,” he adds

As a rule of thumb, Mobius advocates that investors allocate at least 30% of their portfolio to emerging markets as they contribute at least a third of the global gross domestic product (GDP) today. Within the emerging market equity space, he remains “constructive” on the outlook for Asia.

“Emerging market equities have generally outperformed their developed market peers over the past 30-odd years. However, sentiment for these markets has turned negative in recent years, leading to a run of underperformance, similar to that seen about 20 years ago. We consider many of the factors that have driven recent market volatility to be temporary in nature and remain constructive on the outlook for Asian markets,” he says. 

Mobius has spent more than four decades working in emerging markets. He is the author of several books, including The Investor’s Guide to Emerging Markets and Mobius on Emerging Markets. 

During this time, the Templeton Emerging Markets Group will stick to its investment process, which looks beyond the current heightened market volatility. “Our investment process looks beyond the short term and aims to find and invest in well-managed growth leaders at attractive valuations across Asia. We are patient investors, so we do not react to market volatility once we have identified ‘value’ in the stock and invested,” he says.

“As we look forward, it is important to note that historically, times of stress in financial markets provide the largest upside potential in the medium term. Past experience has shown that when so many investors are underweight, there is a strong likelihood that a change in sentiment is due. 

“Often, when it comes to emerging markets, that change could be quite dramatic. We are confident in using this opportunity to stick by our investment decisions until the market recognises the inherent value, and the stock bounces back.”

 

Bullish on China, India, Taiwan and Thailand 

Mobius is bullish on China, particularly its infrastructure and construction sector. Listed companies involved in the construction of high-speed railways are expected to have good earnings prospects.

“We believe China will be a driver of growth and investment opportunity in emerging markets. For one, there is room for investment in infrastructure. The high-speed railways, for example, have been a tremendous boost to the country’s rapid growth in recent years. However, the railway density of the big Chinese cities is still below that of the large cities, leaving more room for investment in rail,” he says.

“We also see opportunities in the consumer, internet retail and automobile sectors, as the economy continues to transition from the old economic model to a domestic consumption-based one, given the rise in its population’s income.”

Mobius also likes Indian stocks, especially in the manufacturing, pharmaceutical and technology sectors. “India is an attractive market for investors, especially in the small-cap space. With a large population base and unpenetrated nature of consumption, the country is one of the last real bastions of growth. The real excitement about India stems from the level of entrepreneurship that the society has displayed both in the traditional industries such as manufacturing and newer sectors such as pharmaceuticals and technology,” he says.

Meanwhile, Taiwan has demonstrated economic success by transforming itself into a technology-driven economic powerhouse within a few short decades. Now, it is looking seriously into growing its investments in the pharmaceutical, biotech and life sciences industries, says Mobius.

As for Thailand, he says the economy will potentially 

benefit from the growth of its fast-growing neighbours. “For one, it is well-positioned to potentially benefit not only from its underlying growth trends but also from the fast growth seen in Cambodia, Laos, Myanmar and Vietnam.” 

According to the fund fact sheets on Franklin Templeton’s website, its best-performing funds include the Templeton India Fund, Asian Smaller Companies Fund and Thailand Fund. The three funds had posted returns of 132.65%, 54% and 32.45% respectively (as at Aug 31).

Meanwhile, its Templeton Africa Fund, Latin America Fund and Eastern Europe Fund suffered the biggest losses during the same period, posting total returns of -21.70%, -17.38% and -14.39% respectively. 

 

Asian small caps present untapped opportunities

Mobius says small-cap stocks in Asia, especially China and India, are presenting investors with untapped opportunities. That is because these companies provide investors with higher exposure to the consumer discretionary sector, which is now benefiting from the countries’ population and income growth.

“Asian large caps have much more diversity in the financial sector such as banks, but small caps are much better in the consumer discretionary sector. They have indeed doubled the number of large-cap companies in the sector. Small-cap companies also have bigger exposure to healthcare than large caps. Investors can find these companies mainly in China and India. India has many small and medium enterprises,” he says. 

“They can also find some small-cap opportunities in Taiwan and South Korea in the technology sector. These small high-tech companies are growing at a pretty rapid pace.”

Mobius says these companies are usually under-researched and undervalued as they are not noticed by banks, fund management firms and research houses. 

The lack of liquidity, which is what investors are concerned about when investing in small-cap companies, could be eased as there is more money flowing into the small-cap space, leading to a higher number of transactions, in the search for yield in the current low interest rate environment. 

“Generally speaking, the flows into emerging markets have not been huge ones. But they have gradually increased as people get more confident. As you know, the search for yield continues. And investors are looking at small caps,” says Mobius. 

While small-cap stocks are more vulnerable to market manipulation, he says investors could mitigate the risk by following a few basic steps. “Investors have to be careful when companies are controlled by families, especially when they hold more than 50% of the shares. It means they can control the movement of the shares. Investors should look at the background and history of these controllers and who the majority owners of the companies are. Check to see if they had any bad lawsuits in the past.

“Investors should also look at the behaviour of the stock price in relation to the stock volumes. So, if you see the volume picking up and the price follows, you have to look carefully to see if there is some manipulation taking place.”

Mobius says the Templeton Asian Smaller Companies Fund, which invests in small and mid-cap companies in Asia, has limited exposure to Malaysia. However, the fund has a stake in three local companies, which are in the retail, media and property sectors. 

“From a top-down perspective, we see the per capita income of Malaysia rising and the middle class growing. We do have positive views on the retail sector. The company [we invested in] is a Japanese retail chain with international links. We like the company’s management and believe that it will take a larger market share [going forward],” he says. 

“We like the media company due to the political situation where certain media companies have to be somewhat careful in the way they behave. And with the decline [in revenue] of these companies, the other companies are gaining market share. They are doing fairly well and taking advertising away from their competitors.

“We believe the property company we invested in will get a larger market share in the future. It is doing integrated developments in very good locations. It has apartments, shopping malls and office buildings.” 

As at Sept 26, Bloomberg data shows that the Franklin Templeton Asian Smaller Companies Fund held 0.49% and 1.25% equity interest in Aeon Co (M) Bhd and Media Prima Bhd respectively.

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