x Abu Dhabi, UAETuesday 25 July 2017

Merit of investing globally

Part of my job involves putting myself out on a limb at times, and I have taken the risk of being subject to contrary (sometimes enthusiastically so) viewpoints.

Mark Mobius expects emerging markets to do better than developed markets this year on the basis of fundamentals. Jeffrey E Biteng / The National
Mark Mobius expects emerging markets to do better than developed markets this year on the basis of fundamentals. Jeffrey E Biteng / The National

Part of my job involves putting myself out on a limb at times, and I have taken the risk of being subject to contrary (sometimes enthusiastically so) viewpoints. I've even been accused of being too optimistic about emerging markets, perhaps partly because my views often represent a stark contrast to dramatic news headlines.

So when I took a look at the findings of Franklin Templeton Investments' 2013 Global Investor Sentiment Survey (Giss), I was pleased to discover my long-standing optimism about emerging markets seems to be spreading among investors.

According to the Giss survey, investors residing in emerging markets are more upbeat about their prospects this year and over the next 10 years than those in developed markets. Of special interest to me among the survey's findings was that many investors seem to be at least recognising the merit of investing globally, even if the bulk of their investment dollars stayed close to home. It still looks like most plan to keep the majority of their assets in their local markets (a home-country bias), but many report they plan to up their allocations into other markets, including emerging markets.

According to the Giss, 58 per cent of investors residing in developed markets believe their local stock market will be up this year, but investors in emerging markets were even more upbeat - 66 per cent believed their local stock market would post a bullish performance.

Similarly, investors residing in emerging markets expected higher returns on their investments, with an average return expectation of 12 per cent this year and 18 per cent over the next 10 years. Those in developed markets expected a 7 per cent average return in 2013, and 10 per cent over the next 10 years. I find that noteworthy as growth rates in emerging markets are also expected to be generally higher than in developed markets this year, although stock market returns don't always directly correlate with growth rates.

In addition, we believe the easy monetary policies of central banks globally could drive more assets into emerging markets.

We think there are reasons to be encouraged that the bullish trends we've seen overall in emerging markets over the past decade could continue. Knowing that market sentiment can play a role in market direction, positive sentiment in the emerging markets just may be one of those reasons.

Of course, not every year is going to be a stellar year for emerging markets.

As I've noted before, if you look at the fundamentals, the growth rate of emerging markets in general last year bettered that of developed markets, and forecasters expect that to be the case again in 2013. That's not to say emerging markets don't face some fundamental concerns. Inflation has plagued emerging markets historically, and food and energy price increases can have a dramatically negative effect on people's standard of living. In the early 1990s, inflation was accelerating rapidly in emerging markets, particularly in Latin America. For example, Brazil's inflation rate (as measured by the consumer price index) in the 1980s and 1990s saw year-over-year percentage increases in the hundreds and even thousands. In the past couple of years, however, inflation has been cooling off in Brazil and some other emerging market economies. Consequently, interest rates have been coming down too as policymakers have more room to engage in stimulative economic measures.

Interestingly, by region, the Giss results reflected particularly strong optimism — and return expectations — in Latin America.

On a specific country level, investors in India were the most optimistic, 85 per cent, about their stock market among all 19 countries surveyed, and expected an average rate of return on their investments of 15 per cent this year. According to the Giss, Indian investors certainly have high expectations! While we don't know exactly why these investors felt more upbeat, I can say my team and I remain optimistic about the country's long-term prospects and believe after a trying 2012, new policy initiatives undertaken by the leaders hold potential.

One last finding from the survey that struck me as interesting: emerging markets in general boast youthful populations, which to us, is more favourable for long-term growth prospects than populations that are rapidly ageing.

 

Mark Mobius is the executive chairman of Templeton Emerging Markets Group