Asia continues to lag other regions for integrating ESG principles with investing; better data and stronger regulatory requirements will help institutional investors, market observers say.
Mark Mobius is president of the Templeton Emerging Markets Fund. His office is based in Singapore, but he spends most of his time travelling around the world in search of new investment opportunities. In his capacity, he directs the Templeton global emerging markets equity group that is spread across 13 offices worldwide. His team covers Latin American, Eastern European, Asian, African and Middle Eastern markets.
Templeton Emerging Markets Fund is part of Franklin Templeton Investments, which manages around $623 billion worldwide. MobiusÆs emerging markets team manages around $30 billion, of which around $18 billion is in Asian equities.
What are the biggest opportunities that you see in the markets you are responsible for in the coming 12 months? How are you preparing to take advantage of those opportunities?
Mobius: Emerging market countries are growing very fast. They include countries like China and India with very large populations whose per capita income is growing, and capital markets in those countries are now undergoing rapid development. Economic growth continues to be strong in many countries, per capita incomes have been rising, valuations remain attractive and reforms continue, thus improving the region's business and investment environment. Also, emerging markets are increasingly not only dealing with developed markets such as the US, but also with each other, and thus the dependence on the US is lower now.
Frontier markets are also looking interesting and have the potential to become tomorrow's emerging markets. Many of the characteristics that have made emerging markets fascinating to investors are now becoming increasingly evident in frontier markets. These characteristics include positive economic trends such as high growth, high potential for capital market development and growth, low correlation to world markets due to their diversity and the presence of attractively valued companies.
How different or similar is your 12-month investment outlook now compared to the start of this year?
Since we maintain a five-year outlook, our view hasn't changed significantly in the last 12 months. We continue to maintain a positive outlook on emerging-market equities, albeit expecting to see more volatility in the short-term.
Have you made any significant changes to your asset allocation in terms of markets or sectors in the past few months?
As bottom-up managers, we do not tend to make country or sector bets and thus any changes at these levels are the result of where we see value at the company level. Over the last few months our global emerging market funds have increased investments in markets such as Taiwan, South Korea and South Africa. Exposure to frontier markets such as Qatar and the UAE was also increased due to the availability of undervalued companies trading at attractive valuations.
What are your favoured markets in Asia?
We continue to find at least some value stocks in most markets. Our portfolios currently have significant exposures to China, India, South Korea and Taiwan. China is a well-known growth story. We expect growth to remain robust, albeit at a slower pace than we are seeing now. India continues to be a key centre for manufacturing and services, particularly in the pharmaceuticals and software sectors. Export growth coupled with a recovery in consumer expenditure in South Korea should support growth. Expectations that Taiwan's new president will be able to form closer economic ties with mainland China should benefit Taiwanese companies. South Korean and Taiwanese companies also offer a good combination of good technological and production expertise.
What are the markets you are going to steer clear of in the coming year?
We don't tend to avoid any markets; it all depends on where we find investment bargains.
What are your market weightings within an Asia ex-Japan equities portfolio?
Our portfolio holdings as of end-May:
South Korea: 14%
Hong Kong: 4%
Which sectors do you expect to outperform in the coming year?
With commodities prices and global demand expected to remain at relatively high levels, the energy and materials/resources sectors are expected to do well. Higher disposable incomes and greater domestic demand in emerging markets is also expected to continue to fuel consumption, thus consumer-related sectors should also do well.
Which sectors do you expect to underperform?
All the others.
What are the main challenges that you expect to face in the coming 12 months?
The long-term outlook for emerging markets remains positive as these economies continue to display relatively strong fundamental characteristics and are still expected to grow at a much faster rate than their developed counterparts. In the short-term, however, we can expect more volatility in view of a prolonged major downturn in the US economy, rising inflation globally, economic overheating in China and India, as well as highly volatile exchange rates and commodity prices.
We have already seen corrections in global equity markets, including emerging markets, bringing markets down to even more attractive levels. It would be impossible to predict when markets will turn around; however, the good news is that bear markets tend to be much shorter in duration than bull markets and bear markets go down by a smaller percentage than bull market increases. We will continue to take a long-term view to investing in emerging markets and invest in companies that are well managed and have clear comparative advantages.
What are the main risks of investing in Asia at the moment? How are you managing those risks?
The main risks in Asia include a prolonged slowdown in the US economy, overheating concerns in China and India, rising inflation, as well as volatile exchange rates and commodity prices. These risks are managed by investing in carefully researched companies with strong fundamentals and taking into account how these factors may affect the underlying investment.
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