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
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.
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…
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?
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.
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.
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.
With ongoing global uncertainty, I believe there are still a lot of questions surrounding the impact of market volatility in both developed and emerging markets. I recently recorded an interview discussing my views on some of these questions and want to share it with you through a video blog. I hope you like it.
I always like hearing from you, and I thank you all for sending in questions and comments. This week, I turn my attention to questions related to emerging and frontier markets, which are a subset of emerging markets.
What is your view on Bangladesh?
– Fuad, Bangladesh
We are quite interested in Bangladesh as an important frontier market. Our team made several company visits there recently and we continue our research there. We are seeing potential and growth in the country, particularly in the banking, agriculture and export sectors. During our visit, we met with brokers, professors and investors to gain a deeper understanding of the economy and market, and we also visited companies across a number of sectors including banks, telecommunications, energy, and pharmaceuticals. For example, one of the companies we visited was a mortgage provider. The company had a diverse loan portfolio, providing loans for housing and construction as well as for home improvements. In our assessment, the company presented an interesting investment opportunity since it appeared to have high growth potential and strong asset quality.
On investing in emerging markets such as Africa, what are your views on the challenges from a structural perspective, e.g. political constraints, poverty and diseases?
Many of you may be particularly concerned about the developments related to debt in the eurozone and the U.S. over the last few weeks. I’d like to take this opportunity to share my thoughts on these events and respond to a couple of reader’s questions.
How concerned are you about the current problems within the eurozone and with U.S. debt? – Peter, United States
To me, the European debt situation does not seem as serious as the U.S. debt crisis, both in terms of scale and the possible impact on the global economy. As such, I believe the world’s focus should really be on the U.S. debt crisis. We also have to remember that the tolerance for debt is generally affected by investor confidence levels. Therefore, we must focus on reinstating confidence, which may be impacted if debt levels rise. Increasing debt levels may lead to a weaker currency, as investors may shun currencies of countries burdened by debt. One possible way to counter the effects of a weaker currency is to make investments that could potentially increase in value over the long-term and could thus potentially help reduce the value-eroding effects of inflation, which can result from a weaker currency.
In Europe, we will continue to closely watch the region’s emerging markets, particularly Romania, Russia and Poland. In Romania, we continue to see plenty of opportunities, especially in sectors such as energy and transportation. I’m also very excited about Russia, where we see high growth potential, particularly in the agriculture, natural resources and oil sectors. We believe Poland offers potential resulting from its strong political structure and what has been its positive gross domestic product (GDP) growth. In fact, Poland was the only country in the European Union to maintain positive GDP growth throughout the 2008-2009 global financial crisis.[1]
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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 loss of principal. Investments in foreign securities involve special risks including currency fluctuations, economic instability and political developments. Investments in emerging market countries 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. Such investments could experience significant price volatility in any given year.
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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