Templeton's Mobius expects eurozone 'Brady bonds'

With the pressure building on Portugal to accept a sovereign-debt bailout and the country set to issue bonds today, emerging-markets specialist Mark Mobius yesterday predicted an outcome for certain eurozone countries similar to what occurred in Latin America in 1989.

“Given the level of the debt-to-GDP ratios [in countries such as Greece, Ireland, Italy, Portugal and Spain], there will have to be a rescheduling and a change in the way they handle the situation,” said Mobius, executive chairman of US asset manager Franklin Templeton, during a briefing in Hong Kong.

He suggests one solution could be similar to the situation in 1989 when ‘Brady bonds’ were issued and the US guaranteed the debt of certain Latin American countries after many defaulted on their borrowings.

Any solution will be a joint effort between organisations such as the European Central Bank and the International Monetary Fund, because no single country will be able to deal with the problem alone, agrees Tom Wu, a Hong Kong-based senior managing director at Franklin Templeton. 

“On a longer-term basis, there will have to be some form of political union and some guarantee by the EU to the member countries,” he adds, “as we have to remember that now the European situation is an economic rather than a political union.”

That said, Franklin Templeton’s outlook for Asian markets remains positive, particularly on China, India and Thailand, says Mobius. He also likes the look of some of the smaller markets, such as Vietnam, although does not allocate as much to them because of liquidity concerns.

With regard to China, many investors are pessimistic, but in valuations terms, things actually look fairly attractive, argues Allan Lam, a Hong Kong-based senior managing director at Franklin Templeton.

“The government may continue its austerity measures to cool the property market, at least in the coastal cities like Beijing, Shanghai and Guangzhou, so sentiment may continue to be bad,” he says.

But many A-shares are not trading at a big premium to their B- or H-shares, and some are even trading at a discount to their B-shares. "It’s a good time to invest when many investors are bearish,” adds Lam.

In response to a question about the major risks for China this year, Mobius says the two main risks are inflation and a continuing weak currency, because to contain inflation, the value of the currency must increase.

“Whenever you have a big increase in money supply,” he adds, “you will have, eventually, an increase in inflation unless this increase in money is sterilised – in other words, the money is quickly taken out and not used in the market – as you’ve seen in Japan.

“But in the case of China, Taiwan and other markets, you can expect inflation to run up unless productivity increases at a much faster pace.”