Rise of the Dragon
Mark Mobius
On January 23, Chinese around the world ushered in the year of the dragon under the Lunar Calendar. The dragon is an auspicious and mythical creature in the Chinese culture. It is a symbol of power such that emperors in the historic days were regarded as the dragon’s ‘sons’ and many Chinese still call themselves “descendants of the dragon.”
With the debt situation in Europe continuing to further unravel and dim economic prospects in the U.S., many have come to believe that the star of the “dragon descendants” has the potential to rise even further in the coming years. China’s GDP growth is expected to moderate to around 8.2% in 2012, which is high compared to developed economies.[1]
The Year that Was and The Year to Come
In 2011, perceptions regarding the composition of the global economy underwent a shift—instead of the U.S. being considered as the world’s key growth engine, investors began to realize that large emerging economies such as China and India were increasing their contribution to global GDP. While the U.S. saw its long-term credit rating downgraded in August and the eurozone was the center of heightened worries about sovereign debt for much of the year, some emerging economies witnessed positive growth in 2011.
That is not to say there were not challenges. As most developed nations continued to implement very loose monetary policy measures, washing much of the global financial system with liquidity, many emerging countries had to reckon with higher prices for goods and services, appreciating currencies and, in some cases, “imported” inflation. In their fight against high inflation, several emerging-market central banks embarked on tightening monetary policies for much of the year, which led to investors worrying about the prospects for economic growth. Indeed, the high-growth economies of China and other emerging Asian and Latin American countries lost some momentum as the year wore on, but to us they now appear poised for softer landings than their developed-market counterparts.
Pioneering Frontier Markets
While emerging markets were considered a niche or “exotic” investment when I started investing in the late 1980s, many investors are now familiar with them and I’m seeing more and more investors turning to emerging markets as a way to diversify their portfolios. Yet, emerging markets themselves are not a homogeneous zone. Within the emerging markets universe, we believe frontier markets as a whole have begun to take an impressive lead in terms of growth.
Frontier markets, as their name suggests, could be described as “new or younger emerging” markets. Located throughout Asia, Africa, Europe and South America, they are often in a much earlier stage of economic development than larger emerging markets and many have only recently opened to foreign investing. This helps explain their high growth potential. Newer markets typically have more room to grow and the search for growth potential amid acute global volatility is encouraging many investors to expand their horizons.
Update on Korean Peninsula
The death of North Korean leader Kim Jong-il on December 17, 2011, escalated the uncertainty surrounding the regime change in Korea, which was preparing for a leadership transition in 2012. Very little is known about Kim Jong-un, the young man who is taking on the role of dynastic head. Some analysts feel that the death of Kim Jong-il sharply increases the risks and uncertainties from the secretive Pyongyang regime, which has significant consequences for security on the Korean peninsula and beyond. South Korea and Japan are most immediately threatened, but China and the U.S. are also deeply involved with vital stakes in North Korea’s future.
We believe Kim Jong-un, being untried and young, may not be entrusted with the power his father had, at least initially, and there is a chance that he will be affected by the rest of the Kim family. We think there is a potential risk that the regime may undertake some type of military activity or nuclear tests in an effort by the new leadership to demonstrate to the outside world that there has been no regime policy change, internal strife or reunification with the south.
State of Emerging Markets
This week I’ve joined forces with Dr. Michael Hasenstab, co-director of Franklin Templeton Fixed Income Group’s international bond department, to bring you our joint perspectives on emerging markets: where they have been, where they are now, and where we believe they are headed.
I invite you to read “Emerging Markets: Yesterday, Today and Tomorrow” at Beyond Bulls & Bears, which hosts perspectives from many of my fellow portfolio managers.
If you are a resident of the United States, you can find that blog here and follow the tweets @FTI_Perspective.
If you reside outside the United States, please find our new post here and follow the tweets @FTIPerspective.
I’ll be back on this blog in the next week or so with my 2011 year in review and outlook for 2012.
Betting on Macau
I count myself fortunate that the continuous quest for good investment opportunities takes me to some of the most exotic and beautiful places the world has to offer. Macau, on the western side of the Pearl River Delta in China, is one of my favorites for many reasons. As an investor, I’m interested in following up on investment opportunities. As a global citizen, I love Macau’s culture and rich history.
Mark Mobius
On the cultural front, Macau’s history and abundant museums cover the Portuguese colonial period and important episodes in Chinese dynasties leading up to the present, but one of the biggest draws for me is the fireworks. Each September, Macau hosts the International Fireworks Display Contest, perhaps the world’s largest such display. Other events that draw big crowds are the International Music Festival in November and an International Marathon and the Grand Prix, during which Macau’s streets transform into a racetrack similar to Monaco’s. Read more…
Readers’ Questions Answered Part VIII
It’s been a while since I answered some readers’ questions. Thank you, readers, for all your responses to the blog—they have been highly encouraging.
Do you think there will be a recession globally or in emerging markets from a mid- to
long-term perspective?
- Asli, Turkey
From a mid- to long-term perspective I believe the global economic situation continues to look very good for a number of reasons. First of all, many emerging markets have continued to grow at a rapid pace and we don’t expect growth to slow down too much over the next decade, although the percentage changes can naturally decelerate when the GDP numbers get bigger.
Second, we believe the situation in Europe can be worked out and there will likely be considerable reform in European countries such as cuts in government spending and measures taken to stimulate business by lowering taxes and reducing bureaucratic burdens. We expect the same could happen in the U.S. and Japan, as those countries and the entire developed world are learning that one way to stimulate growth is to allow business and private enterprise to grow, particularly the small and medium size businesses. Although the move to these policies will likely take some time, we already see the signs of potential change.
What is the impact if one or more countries withdrew from the euro?
- Shiv, India
Commodities & Consumers in Latin America
Many investors assumed that some Latin America countries have been posting strong growth in recent years by riding on the commodities boom, which is currently tapering off in the face of slower prospects of growth in U.S., Europe and China. I provided some views in a recent video interview that I thought you might like to know.
Trouble viewing video? Click Here
Flooding in Thailand
Thailand is battling through the worst flooding in decades. The floods have severely affected over 30 provinces in north and central Thailand, taking a devastating toll on the people there. Estimated damages now range between 1-2% of GDP. Six main industrial estates in the Ayutthaya and Pathum-thani provinces have flooded, impacting over 1,000 factories and supply chains in electronics, electrical and automotive industries. Major retailers have been forced to suspend operations of distribution centers due to logistics disruption. Agriculture is also severely hit with more than 10% of the rice plantation area affected. Based on the data released, Thailand would need at least a month to drain away the current floodwaters.
The banking sector is among the other sectors we expect will be negatively impacted. As a result of a downgrade in projected GDP growth by the Thai central bank of about 2% for 2011, we anticipate bank earnings could drop by more than 2%. We would expect margins for consumer companies could also be hard hit as a result of higher raw material prices as well as higher distribution costs. However, that could balance out if those companies are able to raise prices. We anticipate energy companies should not be impacted as negatively given that demand for energy will likely be increasing.
While the consequences of the flood damage will negatively impact Thai corporate earnings, we believe the long term outlook for Thailand remains strong. In addition to the corporate tax cuts and various stimulus packages that have already been announced, the Thai government plans to spend Bt400 billion (US$13 billion) on investments in dams, irrigation and water management to restore the country. We believe Thailand should also remain an attractive place for foreign direct investment (FDI) due to location advantages, a supportive business environment and highly competitive workforce. While devastating in the near-term, we believe that impact from the flooding should prove short-lived, and that Thailand should recover well from this disastrous event.
China Video Blog
The People’s Republic of China (PRC) celebrated its independence in October. The 2011 celebration coincides with the 100th Anniversary of the Xinhai Revolution, which brought down imperial rule in China, and could potentially be President Hu Jintao’s last National Day celebration before he steps down next year. 2012 will be a crucial year with top leadership changes and transition. I’ve addressed some heightened concerns on China in a recent video interview, which I’m sharing here.
Trouble viewing the video? Click Here
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