Oxstones Investment Club™By Mark Mobius, Franklin Templeton,
As we embark upon a new year, the Templeton Emerging Markets Group believes 2014 could be an important year for many emerging markets, possibly establishing trends that could play out through much of the remainder of the decade. In particular, Chinese government reform initiatives announced in late 2013 could have far-reaching significance. And, major elections in a number of countries in 2014 could bring dramatic (or not-so-dramatic) changes. Here are a few themes and countries we’ve got our eye on in the new year.
China’s Blueprint
In November, China announced a new blueprint for its future, known as “The Decision.” There were some 60 proposals across a gamut of issues which could have dramatic consequences in areas including health care and social security, justice and the rule of law, intellectual and physical property rights, banking and monetary policy, as well as environmental protection. The proposed changes, intended to facilitate sustainable economic growth in China, could also create substantial opportunities for investors. Reforms to state-owned enterprises aimed at improving their professionalism and efficiency in resource usage could benefit their listed subsidiaries. Measures aimed at encouraging enterprise and innovation, as well as blocking unfair competition, could speed up the process of rebalancing the economy away from investment-led growth and toward a more entrepreneurial, consumer-focused and service-oriented model. The project has a decade-long time frame, but we nevertheless expect to see some progress in 2014, perhaps through initiatives in free trade zones such as the one announced for Shanghai in late 2013 and others hinted at in the proposals. Of course, there are likely to be market casualties as a result of these reforms. Companies facing intense competition and now deprived of the level of government support obtained in the past could be negatively impacted. We believe active management is critical in this environment to help spot the pitfalls that could emerge for some companies.
Potential in Southeast Asia
We believe many emerging markets, in addition to China, possess considerable economic growth potential. For example, Southeast Asia has seen a notable extension of growth and wealth away from traditional economic hubs, with previously underdeveloped regions starting to see significant catch-up growth. Thailand is most notable in this regard, as the reforms instituted by former Prime Minister Thaksin Shinawatra have resulted in more money going to the countryside and areas outside Bangkok. While the country is currently facing some political turmoil, which continues to present near-term risk to the Thai market, our long-term view on the country remains positive. From our experience, Thailand has a history of being incredibly resilient. The country has gone through a number of political incidents over the past decade, and every time it has managed to recoup and bounce back. We don’t see it being different this time. Any political party has to satisfy the masses; Thailand’s leadership is no exception. We will continue to monitor the situation closely, but we think Thailand will eventually find its way out of this current turmoil. In our view, the fundamentals, the basic structure of the society and the investment case for Thailand remain strong.
Around the Globe
On the African continent (which is generally considered a frontier market) we have continued to see some companies thriving in Egypt despite some turmoil there, and have therefore maintained our interest there even though the news headlines have sometimes been alarming. Egypt is a big country with a big population, and is a leader in the Middle East given its strategic and geopolitical importance. If Egyptians opt to have free and fair elections again under controlled conditions—and with a change in the Constitution to prevent one party from dominating, then I think the future could be bright. Elsewhere, some South African consumer companies have been starting to enjoy solid growth, both domestically and in ventures elsewhere on the continent.
Kenya is home to a groundbreaking mobile money transfer system that is spreading to other countries and likely will have implications for emerging markets globally. There are many countries and companies to look at in Africa, which we are excited about in the coming year. We think it’s wide open there.
Microfinance initiatives in Bangladesh, a frontier market in Asia, are justly famous, in our view, and being duplicated in other parts of the emerging-markets world. A lot of money has flowed into frontier markets generally this past year, so valuations have of course risen in some markets. So, we have to watch for situations where corrections could be coming.
Russia has continued to see gradual reform as authorities seek foreign investment. Nevertheless, investors have been wary and thus Russian equity valuations overall at year-end 2013 were exceptionally low, in our view. We believe Central and South America also could continue to provide investors appealing long-term investment opportunities across a range of sectors and countries.
As consumption patterns in Brazil continue to evolve as per capita income increases, we expect the country to become a leading consumer of products (both non-durable and durable) not only produced in Brazil but also those imported from regional and global markets. Moreover, Brazil will be hosting the World Cup in 2014 and the Olympics in 2016. As a result, we have already seen and expect to continue to see the country investing significantly in infrastructure. This should help drive economic growth in the coming years as well as improve the basis for stronger sustainable growth in the long-term, in our view.
The Mexican market has been benefiting from significant investor interest recently, especially as the outlook for the US, which is Mexico’s largest trading partner, has been improving. Mexico’s competitiveness to supply the US has also significantly improved over the last few years. Many companies have continued to grow their operations in Mexico to produce high value-added products such as automobiles, planes and medical devices. We expect this trend to continue developing in the medium and long term. A long period of increased economic and political stability has also allowed the government to concentrate its efforts on long-awaited reforms. We expect the implementation of important reforms to continue in the near future, which should have a more immediate impact on government finances and could improve GDP growth in the long run.
Elections and Potential for Change
A number of major emerging markets will hold key elections in 2014, including Indonesia, South Africa, Thailand and India in the first six months of the year, and Turkey, Brazil and Nigeria later on. As the electoral cycle peaks, we believe administrations may feel more able to address barriers to long-term growth and retreat from populist measures. In these circumstances, ongoing strengths in many emerging markets, in terms of solid economic growth potential, strong public and consumer finances, rich natural resources and favorable demographic trends that have helped them over the past several years could gain new traction.
India is one country where I think we could see some positive surprises in 2014. The Bharatiya Janata Party (BJP) scored some key victories in India’s state elections in early December, and if the BJP gains control on a national scale in the spring elections, it is likely to implement some big reforms that many (including us) believe are badly needed. Regardless of political leanings, though, we are bottom-up investors; we look for companies we think can weather various political outcomes and economic conditions. I think it is important as an investor to consider India as a conglomerate of states and focus on companies located in states with a more business-friendly environment, where business is encouraged.
As long-term fundamental investors, we do not make short-term predictions for share prices, but we believe longer-term developments that look likely to gain traction in 2014 could drive solid growth potential in many emerging economies.
Terms of Use
The information provided in this posting is not a complete analysis of every material fact regarding any country, region, or market. Comments, opinions and analyses contained herein are those of Dr. Mobius and are for informational purposes only. Because market and economic conditions are subject to change, his comments, opinions and analyses are rendered as of the date of this posting and may change without notice. His opinions are intended to provide insight as to how he analyzes securities and his commentary is not intended as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. Reliance upon information in this posting is at the sole discretion of the viewer. Please consult your own professional adviser before investing.
All investments involve risks, including the possible loss of principal. Investments in foreign securities involve special risks including currency fluctuations, economic instability and political developments. Investments in emerging markets, of which frontier markets are a subset, involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets. Because these frameworks are typically even less developed in frontier markets, as well as various factors including the increased potential for extreme price volatility, illiquidity, trade barriers and exchange controls, the risks associated with emerging markets are magnified in frontier markets. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions.
Data from third party sources may have been used in the preparation of this commentary and neither Dr. Mobius nor Franklin Templeton Investments has independently verified, validated or audited such data. We do not guarantee its accuracy.
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