In the first in a series of special articles from key industry figures to mark FinanceAsia's 20th anniversary, Mark Mobius, the chairman of Templeton Emerging Markets Group and an icon in the emerging markets space, discusses some of the changes he has seen in the past two decades.
When we started the first listed emerging markets fund in 1987, the term “emerging markets” was new. Previously, these countries were known as “underdeveloped”, “third world”, “poorer nations”, “the South” or other names with negative connotations.
Calling them “emerging” came from the realization that as they adopted market-oriented policies, they could achieve very high growth rates from a low base. Early investors were able to invest in companies that were trading at attractive valuations because they were typically under-researched and undiscovered, while the wider investment community had limited access to those markets.
SOARING GROWTH
During the past few decades, they have recorded faster growth rates than developed markets as they became wealthier and integrated into global markets. An expanding middle-class population, with higher incomes and spending power in countries such as China and India, supported economic growth, and this trend is likely to continue.
Driving through Shenzhen a few months ago, I could see how it has transformed since the first time I visited about 20 years ago. Where there were once rice fields, office and apartment buildings have sprung up—some of which are now among the tallest in China. Currently under construction is the 600-metre Ping An Finance Centre, which would be the second-tallest building in China and the fourth-tallest building in the world upon its scheduled completion later this year.
As urbanization continues in China and more and more people move into high-rise apartments, not only is transportation infrastructure needed but also cultural and entertainment facilities, which the government has encouraged. One company we visited was typical of a trend combining housing projects with entertainment and tourism projects, including theme parks, hotels and cinemas.
Of course, China’s presence and influence is spreading throughout the world. On a recent trip, the first thing I noticed when driving from the Buenos Aires airport to the Puerto Madero area was a tall, modern skyscraper at the end of the port channel with large logo initials of a Chinese bank at the top.
Argentina has imported substantial amounts of telecommunications equipment from the likes of Huawei, China’s electronics equipment giant. Discussing this with the Argentinian telecom companies during, we heard that the Chinese payment terms and conditions were very generous and that large teams of Chinese technicians were brought in to do the maintenance, which was deemed as superb.
RICH DIVERSITY
China is just one, albeit the most spectacular, emerging market with enormous potential.
Representing a group with diverse histories, geographies and cultures, and accounting for almost three quarters of the world’s land mass and four fifths of the world’s population, emerging markets recorded a combined average annual growth rate of 5.5% during the past 20 years (more than double the 2.1% growth by the developed markets). For 2016, we forecast 4.1% average growth, more than double the 1.9% rate expected in developed markets.
When we launched our first emerging market fund in 1987, there were only a handful of markets in which we could invest, but gradually the amount of money pouring into emerging markets grew significantly. With the subsequent development of formal securities markets, equity legal structures and trading systems, investors increasingly began identifying international equity investing not only with overseas developed countries, but also with the emerging markets of the world.
Today, we can invest in about 70 markets and the investment opportunities continue to expand. The growing interest in emerging markets over the last 20 years is evident by the substantial increase in the market capitalization of emerging markets as a percentage of the world market capitalization. The weighting of emerging markets has risen from 12% in 1995 to 34% in 2015.
Economic development in many of them is taking place at a rapid clip and the evidence is clear to any observer. Modernization might mean the fading of some colourful, traditional practices, but rising standards of living and more consumer choice are compensations.
Many years ago on a visit to Sri Lanka, I witnessed the impressive processions during the “Festival of the Sacred Tooth,” where the tooth relic of the Buddha is carried on a richly decorated elephant and taken on a grand procession through the city streets, led by traditional dancers and drummers.
Late last year, we went to the same area – and what a change. We toured a new, modern mall, and in contrast to my prior visit to the area, rock band was playing for the entertainment of the teeming shoppers.
More positive attitudes by international investors have also supported the expansion of the capital markets in many emerging countries.
In fact, emerging equity markets have performed better than their developed counterparts during the past two decades. Based on a $1,000-annual dollar cost averaging investment, $20,000 invested in emerging markets would have returned $41,250 at the end of the 20-year investment period, higher than the $39,418 in developed markets. The 20-year annualized return for emerging markets was 3.7% compared with 3.4% for developed markets.
Initially, investors were apprehensive about investing in regions outside the established markets of the US, the UK, Germany and Japan. Emerging markets offered different challenges, such as weak regulation, poor information and transparency, few custodial services, no delivery versus payment procedures, foreign investment restrictions, currency devaluation, as well as recurring political turmoil and social and economic instability.
EXPANDING UNIVERSE
While some of these problems still exist, they are not as prevalent as they were in the 1980s and 1990s. Moreover, investors have learned that most of these risks can be properly assessed and managed, providing them with more than commensurate returns.
The investment universe has continued to grow, with interest extending into so-called frontier markets in Africa, the Middle East, Balkans and Baltics as well as Asia.
Typically smaller and less liquid than emerging markets, frontier markets are nevertheless investible and have the potential to grow into tomorrow’s emerging markets. Many offer investors attractive opportunities, comparable to the potential offered by emerging markets in the late 1980s.
Despite these obvious attractions, many investors are cautious. A recent survey found that about 30% of fund managers were underweight emerging markets equities.
This is misguided. We believe that a large number of investors are missing out from the prospect of high returns from exposure to the world’s fastest growing economies. FA
