

Mark Mobius' Tour of Emerging Markets

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MARK MOBIUS STARTED FOCUSING ON EMERGING MARKETS back in the 1970's, long before most U.S. investors had turned their attention to nascent economies. With Europe now reeling from debt problems, and the strength of the U.S. recovery still in question, Mobius, who oversees emerging market funds for Franklin Templeton Investments, thinks investors need to refocus on the developing world.

Mobius talked to us recently from Shanghai.

Barrons.com: If you could just talk in general about your feelings about investing in the region at this point. What do investors need to look out for?

Mark Mobius: What has happened I think is a sort of sea change in the whole economic picture globally, because you have a situation in the developed countries where the debt levels have gone up to very, very high levels. So debt to GDP ratios for the developed world are much higher on average than the emerging markets. The other thing that has happened is that the emerging markets have a lot more foreign exchange reserves that they've built up. So if you look at the credit default swaps, spreads and a number of other indicators, clearly investors are beginning to think well maybe emerging markets are not so dangerous as they usually are set out to be. If you look at the fundamentals we have to say that emerging markets make a lot of sense, because the growth rate is about 4 times more than in developed countries.

Fund Facts


Assets:$2.3 billionExpense Ratio:1.91%Front Load: 5.75%Annual Portfolio Turnover:46.8%Yield (before fees):1.54%


Top 10 Holdings

Top Ten Holdings (as of April 30)

Vale SA  PBRITUBTata Consultancy Services Ltd. Sesa Goa Ltd. Gazprom Lukoil Holdings Mining and Metallurgical Company Norilsk Nickel Anglo American PLC  PTR

Sources: Morningstar, Franklin Templeton Investments

Q:But aren't some of China's biggest customers like Europe going to be hurting for the next few months. How does an investor factor that in? Isn't that a concern for people looking at China now?

A: Well there is no question the Chinese government is very concerned about a slowdown in the export trade. What they have been trying to do is pump up domestic spending. The interesting thing is that [the slowdown] has not really happened, because if you look at the purchasing managers index in the States and put that next to the purchasing managers index in China, they are almost identical. In other words they hit a bottom last year and now they have come up back to where they were. So, we are in a very interesting situation where the purchasing managers are buying up a storm either mistakenly thinking that consumers are going to come back into the market or realistically [thinking they're coming back]. I think the latter is probably the case, because purchasing managers usually follow the market pretty closely. So the downturn that everyone was expecting to continue is not coming to fruition. Now there will definitely be a slowdown from Europe. But again these things can be fairly short-lived, particularly if the governments keep on pumping money into the systems, which of course Europe is now doing.

Manager's Bio

Name: Mark Mobius

Age: 72

Title: Executive Chairman, Templeton Asset Management Ltd.

Education: Bachelor of applied arts degree and Master of Science degree, Boston University; Ph.D. in economics, Massachusetts Institute of Technology.

Hobbies: cycling

Q:Which particular emerging markets and which particular sectors are most interesting for investors?

A: Well, for us, if you look at our emerging market funds generally speaking the big countries are Brazil, Russia, India, China, South Africa, Korea, Turkey. And in terms of the sectors, commodities are right up there. Anything having to do with commodities is of interest because we expect commodity prices to continue moving up. Integrated oil companies are a particular favorite of ours.

Q:Which particular oil companies do you like?

A: In the oil area our main investments are Petrobras (PBR) of Brazil. [Over-the-counter traded] Gazprom in Russia, the biggest gas company in the world now, [Over-the-counter traded] Lukoil in Russia, and PetroChina (PTR) in China.

Q:What are companies in some other sectors that you are looking at right now?

A: The other area would be iron ore. If you just take automobiles and the amount of steel going into automobiles in China -- and of course now China is selling more automobiles than in the US -- you realize that iron ore is in great demand. And nickel, for example, [London-traded] Norilsk Nickel in Russia is one of our major holdings.

Some of these iron ore companies are becoming more integrated in a sense that they are going to into other areas, for example Vale do Rio Doce (VALE) in Brazil is the largest exporter of iron ore in the world, but now they've become a major producer of nickel and other commodities.

Investment Philosophy

Under normal market conditions, the Templeton Development Markets Trust invests at least 80% of its net assets in securities of developing-market countries. When choosing equity investments for the fund, Mobius applies a bottom-up, value-oriented, long-term approach, focusing on the market price of a company's securities relative to his evaluation of the company's long-term earnings, asset value and cash flow potential.

Q:In China, is there a sense that GDP will have to slow a bit at this point or will the rate of growth somehow accelerate?

A: I don't think it will accelerate. I think it will continue to grow at a high rate. When we talk about high we are really talking about anything over 7, 8, 9% in that range. The first quarter, I believe, some of the numbers were as high as 10%. But I think the government doesn't want to get things out of control and they've recently, as you know, made it a little more difficult for people to buy homes and apartments, because it was getting overheated particularly in the coastal regions

Q:Some people are talking about a possible Chinese housing bubble. Is that something that you think could come to fruition?

A: No I don't and I'll tell you why. First of all it is true that property prices in the major cities like Beijing, Shanghai, Shenzhen have gone up 20%, 30%. But in the hinterland when you go inland to the other cities you will find that prices have not moved that much. The other thing is that in China the debt levels at the household level are very, very low, you know they pay cash. Money down for apartments is 30%, 20%. A lot of people pay in advance before the mortgage is due. So it is a completely different picture than what we have in the States, you know, where people are so heavily leveraged.

Q:In China, what companies do you find attractive right now?

A: In China we like [Hong-Kong traded] Denway Motors, which by the way is now going through a merger with its parent. They do the Honda automobile dealers in China. We like Chinalco (ACH), which is the Chinese aluminum company. We like [Shanghai-traded] China Coal Energy Company. We have that in our portfolio -- one of the largest producers of coal. Most of the power production in China is coal-based. And we like a company that is traded in Hong Kong called V Tech Holdings. They do cordless phones and also electronic toys for children.

Q:What makes V Tech interesting?

A: They have a very big market share in cordless phones which is a pretty steady business that is not only going to Europe and the US but all over the world and their toys are quite unique and advanced. And so they have a very strong market globally in that arena.

Q:There was a time recently when emerging market stocks were rising. More recently they have gone down a bit. You think this is a real buying opportunity?

A: Yeah. I'm not saying that people should rush in, because there could be further corrections along the way. But I do think you have got to get exposure to emerging markets some way or the other, because our calculation now indicates [emerging markets make up] something like 30% of the world market capitalization. So people really should get exposure to emerging markets.

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