Mark Mobius  the Pied Piper of emerging markets.

'We are in a very critical situation because the rules of the game are beginning to fall apart'

"If everyone adopts exchange controls, global investing as we know it may be over," says the 63-year-old American with no hair and a delivery so measured that if you are not paying close attention, it is easy to miss the significance of what he says.

To repeat: "Global investing as we know it may be over." Now, most ordinary people do not worry about that sort of thing. They might get a little anxious about interest rates over their cereal, but they do not give themselves a heart attack over the IMF.

But Mark Mobius is not an ordinary person. He is a guru. And in particular, he is a guru of emerging markets. In fact, he is the guru of emerging markets. And if you are the guru of emerging markets you worry very, very much about the IMF. Right now, you also worry very, very much about emerging markets because things are not looking good.

Dr J Mark Mobius, to give him his official title, is a fund manager. He works for Templeton Worldwide, the American mutual fund business and right now has about $10-billion of other people's money to look after. In fact, some of it is his own; he will not say how much it is, probably a few million dollars.

The bad news for Mobius is that a year ago that $10-billion was $14-billion. The money is spread between seven different funds and are all invested in the emerging markets of Asia, Russia, Eastern Europe and Latin America. Which explains why, in the last year, he has managed to lose $4-billion. If there is one place you did not want your pension invested in the past year, it was emerging markets.

In London, shares in his Emerging Markets Investment Trust - around 150p a year ago - are now languishing at 62.5p.

So what went wrong? Gurus are not meant to get it wrong; that is why they are gurus. After all, if the world's Pied Piper of emerging markets loses $4-billion in a year, what hope is there for the rest of us? He says he reduced his exposure to Russia and Thailand before the worst hit. "But we can't exit countries completely otherwise we'd end up with cash and that's not what our clients want."

And is President Clinton right when he says the world economy is facing its most serious challenge in half a century? "Yeah," he says, in between measured mouthfuls of muesli. "I would agree with that. It started in the emerging world and now it's spreading and it's going to impact America and Europe. Japan was already in trouble, but the real problems started with the devaluation of the Thai baht last year. I would say we are in a very critical situation because the rules of the game are beginning to fall apart." Given we have travelled at the speed of light from emerging markets to America to Europe to Japan and landed in Thailand, I am not exactly sure which rules and which game he is talking about.

"The new rules," he says, "in the open world order were that investors would be able to repatriate their capital and profits. Now with the move by Malaysia (to introduce currency controls that mean foreign investors are not free to take their money out), that rule is broken. So the international community is facing a possible shutdown of capital flows of more countries copy."

If you were hoping for some good news about the state of the global economy, you can stop reading now. Mobius has none to give. A huge 20% of his funds are now in cash, although he is just beginning to spot buying opportunities in Brazil, Poland, Thailand and SA. Countries to avoid at all cost, he says, are Nigeria and Ukraine.

As benefits an extraordinary man, Mobius leads an extraordinary life. Ask him where home is and he says he has two: one in Singapore and one in Hong Kong, but then he tells you he is only there for two months of the year. His parents were German, but he was born in Brooklyn and has spent more than 20 years living and working in Asia. Ask what he is up to this week and he tells you today and tomorrow he is in London meeting investors, then Germany, then Sweden and right now he is on his way to Tokyo.

No wonder he needs his own Gulfstream jet, waiting at Stansted Airport, to whisk him and his posse of eager young analysts around the globe. Five of them are sitting at the next table having breakfast: probably discussing the IMF, I imagine, and keeping a watchful eye on their master to see if it is time to go. In fact, those who know him say he needs to be managed on the time-keeping front - like most gurus, he probably has far more important things to worry about than time. But does he ever get lonely, leading that sort of life?

"Lonely?" he says, as if he cannot quite grasp what I mean. "No, I'm involved in work."

Mobius is really not like the rest of us. For starters he has more qualifications than most company boards have between them: bachelors and masters degree from Boston University, a PhD in economics and political science from Massachusetts Institute of Technology, not to mention his studies and the universities of Wisconsin, New Mexico and Kyoto. When he talks about money worries, he means the trillions of dollars that shoot round the world every day "in search of safety and income", not the balance on his current account.

Many emerging market countries, like Russia, he says, were simply not ready to open their markets to free-flowing global capital. While he points to the likes of George Soros and Julian Robertson of Tiger Management as the big hedge fund players, he says they cannot be blamed "because they are only playing the game according to the rules allowed by the authorities".

His solution to the impact of hedge fund shorting, radical though it sounds, is two-fold: close down the futures market and forbid people to short stocks.

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About his ideal holiday, he says Sardinia. "In one of those healthy hotels where they have mud baths, you know?"

Emerging mkts on cusp of next big bull run: Mark Mobius

Published on Mon, Apr 27, 2009 at 17:40 , Updated at Tue, Apr 28, 2009 at 12:29
Source : CNBC-TV18

Mark Mobius, Managing Director of Templeton, also christened as emerging market guru, signaled it a few weeks back, in early March, when the world was collapsing or the world of equities was collapsing. That time he said he saw great value in emerging markets and many global equity markets may see a very good rebound. Indeed the rebound has come.

In an exclusive interview with CNBC-TV18's Udayan Mukherjee, Mark Mobius said that market is currently building a base for the next big bull rally, which can be clearly seen “if you look at the valuations, flows of funds, the amount of money being printed not only by the United States but also by the governments around the world. If you look at money supply ....as soon as the velocity of that money increases then you will have a bull market in a big way,” Mobius said, adding that he sees a retest of the lows seen in October but those lows won't be broken.

The worst for the markets is over, Mobius said. “The money supply is increasing in a fast pace, inflation is coming down and with that interest rates are coming down. All of these factors have a hand to play in pushing stock market prices up.”

Here is a verbatim transcript of the exclusive interview with Mark Mobius on CNBC-TV18. 

Q: Are we still in a bear market or do you think we have turned the corner?

A:  I think what we are doing now is building a base for the next big bull market. You’ll notice that the pricing is moving up and down in a relatively large channel and that channel has a upward slope. So if you look at the valuations, flows of funds, the amount of money being printed by not only the US but the governments around the world. If you look at money supply going up as soon as the velocity of that money increases then you will have a bull market in a big way. But right now we are building a base.

If you look at the difference from the absolute bottom in October, we are up about 20% and in some cases we are up more than 50% or 60% in some of the emerging markets around the world. So you might say if you define a bull market as being over 20% increase, we are already in a bull market in some places. But for the true long-term bull market we will have to wait a little longer but the base is being built right now.

Q: Do you think the worst of the bear market is over though from a pricing point of view? Do you think we saw the most of the price destruction in the last couple of big falls on October and March or do you fear in this consolidation phase those lows could be retested or even violated?

A: I don’t think they will be violated. I think they might be tested, but it would be part of this base building process that I mentioned. I think the worst is over.

Q: So you are not ruling out the possibility of the S&P in the US for example going back and retesting those 666-667 kind of levels?

A: The exact level is impossible to give. No one knows where we will be at any particular time but what I am saying is that the valuations look very attractive not only in India but in other parts of the world. The money supply is increasing in a fast pace, inflation is coming down and with that interest rates are coming down. All of these factors have a hand to play in pushing stock market prices up.

Q: Purely in definitional terms, how would you describe the rally that we have seen from the bottom of the 9^th of March? Some people are calling it a bear market rally, no more than that. Others believe that is something more than that. How would you define it – what we have seen so far?

A: I wouldn’t say that it's a bear market rally, I would say that we are now at the cusp of a new bull run for emerging markets at least, I can’t speak for the developed countries, but for emerging markets at least we are seeing that. The fundamentals are very good and the foreign reserves are much higher than the developed countries. The debt to GDP ratio too is lower than the developed countries. So, all of these factors point to a very optimistic scenario for the markets.

Q: Has this rally left out a lot of investors because there was such a lot of disbelief at the first part of March. Do you think a lot of global investors have managed to participate in this rally or is there a general left out feeling of people on the sidelines?

A: I think there's a general feeling of being left out. I think many of the global investors are heavy in cash. If you talk to money managers and look at their portfolio then you can see that they have a lot of cash, in some cases they have as much as 90% in cash when we look at the hedge funds operators. So there is a lot of cash waiting for the time when they want to come back in. If you look the spread between emerging market's debt and US treasuries, you will see that it’s still quite high. It’s about 7.5%.

That has to come down and it’s beginning to come down before the markets really come up in a way that they were previously. So everyone is very cautious. If you pickup the newspapers you will read a lot of bad news. People are concerned and therefore they don’t participate and then when they see market go up by 20-30% as I mentioned, then they feel a little disappointed that they didn’t participate. But then they say well this is just a bear market rally and I will wait till it comes back again. So that is the psychology we are facing right now and the big international investors have not really come back.

Q: Do you think the market will give them an opportunity? Last few days, the investors that we have been speaking to are all saying we would like to buy this market but on declines, on dips, not at current levels because it has run up quite a bit. Do you think that opportunity will be given by the market to them, 15-20% dip for them to re-enter and to deploy the cash that they are sitting on?

A: Yes, I think for some stocks that will certainly be the case and as I mentioned with this base building you are going to have this volatility, one day you will have bad news come in and there will be an opportunity to come back in again. So this doesn’t necessarily have to be a rush, but I would say that people have got to be prepared to put some money in the markets because currencies are not really the place you want to be right now, with interest rates coming down at the rate they are. Some emerging market bonds are quite interesting rite now. That would be another area. But I would say to be invested now is very important.

Q: At some point this year do you see the possibility of any kind of a buying panic for people who are not exposed adequately to equities or commodities as an asset class who have been very risk averse – do you see that possibility at all?

A: Definitely there is that possibility. The problem that managers have faced including ourselves was that in October and November when we wanted to buy we couldn’t because you had redemptions coming out of the funds. Net redemptions continued from October-November, December and a little bit of January, now it’s turned positive. But in the meantime you have seen this move up in the markets. So it’s very difficult for money managers if they having redemptions and that true across the board. Now it’s changing and you are getting a trickle of money coming in but still it’s certainly not a normal situation that we would see where people would really want to put money to work. So it’s going to take time for this confidence to return.

Q: Just want your thoughts on how much time it would take to go through this base building period, we have seen few months of this volatility within a channel as you described, by when do you think we will be done spending time in this channel, the base would be built and we could actually firmly start our way into the next bull market?

Q: Are you then saying to just read between the lines that 2010 calendar could actually be a bull market year for the equities?

A: I think it could very well be with the amount of money that’s floating around in cash, there could definitely be another bull market run. We must remember these days things move very quickly with communications the way it is and money movements the way they are, you could find bull market upon us very soon.

Q: What are you doing now yourself after this rally that you described 20% in the US and money markets 40-50%? At current valuations given earnings, are you taking some profits off the table or are you remaining invested for much bigger gains during the year?

A: We are still quite cheap, we are still finding most of the stocks and in fact our portfolios have an average price to earnings ratio of less than 10, price to book value of less than 1.5 and in many cases less than one and dividend yields average of about 4%. So you can’t say that this is expensive. It’s quite reasonably priced and that’s the reason why we want to be fully invested. So any money we get in, we immediately put it to work.

Q: There has been a lot of talk last year about decoupling between emerging markets and the US market. In the current rally of the last few weeks, most markets have moved pretty much in sync. Do you think in calendar year 2009 as we go along, you could see some signs of decoupling between these markets? Do you think it is time to revisit that old decoupling debate?

Q: Fair enough. Decoupling may not be a viable concept but you are bullish on emerging markets more than you seem to be in the US. How would you approach this whole BRIC universe? That was the raging theme in 2007 and 2008, it sort of fell off after the big correction but what would you back in the BRIC universe now?

A: First, the opportunities — China obviously, because they are growing at incredible pace compared to other countries. I was in China yesterday in Shenzhen and it is amazing to see the way these people are working, celebrating, playing. They are just so active and so many things are happening. So China is number one.

Number two is India, again growing at a very fast pace. We are expecting 4-5% this year and these two countries, don’t forget, are over a billion people. So per capita income is moving up, consumption is going up. Those are the two hotspots I would say.

After that I would say Brazil is very important for us and then believe it or not, Russia. Russia has been beaten down but we believe they are going to come back and they are going to be quite exciting.

Q: The recovery that you just spoke about across many of these markets like China, Russia – do you think they are leading some kind of a definite economic recovery?

A: That’s right because as you know the stock market leads and then the economy follows. China had their big downturn when there was knowledge in the market that the economies would slow down. Now it is looking to the next year recovery, so we are seeing a very good market in these countries.

Q: But what about the developed markets like the US? Would you say the same that stock market turnarounds are heralding some kind of an economic turnaround or would you continue to be underweight as an asset class on developed market equities like the US market for example?

Q: What about Europe – where do you stand on that?

A: Western Europe is the same thing. There are some companies — in fact, we’ve invested in a Swedish company that’s the biggest cosmetics company in Russia — so you have lots of companies that you can look at in the European market but again there are so many other opportunities in Eastern Europe, we just want to stick there.

Q: Let me just come back to that BRIC point once again because the hope in this part of the world is that it is China where people had become excessively pessimistic about but that is the one which will lead a recovery across Asian markets and will be the first to recover this year as well. Do you subscribe to that theory?

A: Exactly. You’re seeing numbers all over the place but I personally think their target of 8% — I would 7% to be conservative — but from what I see they are going to be able to achieve that.

Q: Equally this – there is so much talk going around about the kind of stimulus package that China has unleashed which dwarfs anything that we are seeing out of India and of course across many developed markets as well and the construct now seems to be that or the story now seems to be that, that is the one which will lead to a big turnaround in the region?

A: That’s an interesting story because Shenzhen where I was just yesterday and I saw things really booming there, what's happened is that of course 10 million workers went home for Chinese New Year, now about 8 million have come back – we are talking about a quarter of million unemployed in that area.

In the context of the billion people, that’s not very much and of course everything in China is on a big scale. But we haven’t seen the unrest that you would expect. It is pretty disciplined. It doesn’t mean that you don’t have strikes and demonstrations. Of course, that’s going on all the time but [there is] no major problem in that regard and the government is moving very fast.

They are pumping money into the economy at a rapid rate. They have their own stimulus programme, over USD 500 billion is being spent, banks are lending very rapidly, the lending amounts of the banks are doing are very high now. So I think they are going to be moving along and achieving those growth rates.

Q: It is not just China. The whole hope on which the global markets seem to be rising now is that we haven’t seen this kind of coordinated government policy action in any crisis in the past and people are sort of betting on that, that the new Geithner plan, the kind of money which is being thrown into the global markets that will eventually work out. Where do you stand on that hypothesis? Do you think this kind of government policy action will eventually lead markets out of their depression?

A: As far as I see, money supply is being pumped into economies around the world — not only in the US but also China, India, you name the country, they are pumping money. Why do they feel comfortable doing that because interest rates are coming down and inflation rates are coming down. So they feel comfortable making these moves to pump money into the economies. In the emerging markets, foreign exchange reserves are at all-time highs, the debt to GDP ratio is very low in these countries. So they’re able to pump money in. The fear and I think the big problem that we could have going forward is protectionism.

If Europe, US become protectionists, all bets are off and that would be a bad thing not only for the US and Europe but of course for emerging markets and I am not just talking about exports, I am talking about investment, trade flows, money flows back and forth. This is very important to continue in open society and open trade and investment situation.