Mark Mobius, Ph.D., executive chairman of Templeton Emerging Markets Group, is one of the most successful emerging markets investors over the past two decades. Over his 40-year career he has become an influential voice in the financial industry. While Mobius has stepped back from the day-to-day management of Franklin Templeton’s funds, he still has input over the direction of billions of investor dollars.
MoneySense caught up with Mobius during a recent stop in Toronto to get his thoughts about China, emerging markets opportunities and where he thinks might trigger the next financial crisis.
MoneySense: Over your career there have been a number of financial and market crises. What is the biggest problem you see right now?
Mark Mobius: I think one of the problems we’re facing now is ETFs. They’re beginning to dominate the markets. I mean if you look at the total market capitalization of all funds, one-third is ETFs and growing fast.
That is something that we have to watch because what’s happening is the greater concentration in big cap stocks. If there’s a market downturn, they have to unload together. That, combined with whatever other factors come into play, could be a real crisis in the equity markets.
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There’s no problem as long as the markets are going up in one direction. It’s when the markets turn when people have to unload this, then you have a liquidity crisis, and that is the issue we’re concerned about.
MS: Is this sort of along the lines of algorithmic trading?
Mark Mobius: Yeah, that’s part of it. If you’re an ETF, you’ve got to automatically move with the market, whatever it is. You know, if Alibaba goes down by 10 per cent, you’ve got to reduce that amount. And you get a snowball effect where you can’t stop it. People are selling. Prices go down. You’ve got to keep unloading and then it becomes self-fulfilling, and it could be very dangerous.
MS: But ETFs were around during the financial crisis. Was there any evidence of that happening during that period?
Mark Mobius: I haven’t done research on that. I don’t think it was a big issue because they were then very small. But even then, we had enough of the active managers who were following the index who panicked and had to get out and couldn’t and a number of people going under as a result, but it was more of the bond holders who were doing that.
MS: Putting aside your concerns about passive investments like ETFs, does it make more sense to adopt a passive versus an active strategy to gain access to countries like Africa, India, to China? Let’s face it, there’s not a lot of people who have in-depth knowledge of these countries.
Mark Mobius: It gets dangerous if you begin to do a passive strategy in individual countries. I would say probably an active strategy would make more sense.
MS: What about getting into China, though?
Mark Mobius: Yeah, they’re big enough and varied enough, so that you could have a strategy there where it’s passive, but you run against the same problem that you’re having now where the better bargains are in the small and medium kind of stocks, not in the large category. And with a passive strategy, you’d be stuck with the large category. So that’s why I say there’s going to be room for both. I don’t think it is one-size-fits all.
MS: How do you factor political risk into your investment decisions?
Mark Mobius: One thing you’ve got to realize is that it really doesn’t make that much difference as to what political system you have. You can have a dictatorship. You can have a one-party state. That is not the prime consideration. The prime consideration are two things.
One, what are the chances of the government taking over businesses? In other words, disenfranchising us of our holdings.
And two, what are the possibility of us being unable to get money out of the country? Regardless of the exchange rate risk. When the government says look, like Malaysia did during the Asia financial crisis, we’re not going to allow you to get money out, this is a real problem.
So this is what we look at. We say, okay, let’s find out if the government is oriented – like, for example, when Chavez came in to Venezuela, we got out. Why? Because he had clearly stated we are going to take over the companies. And we said, look, there’s no sense staying around.
It was interesting because we had a big holding on Electricidad (Electricidad de Caracas) the big electric power company. And AES—I don’t know if you’re familiar with AES, a U.S. company, global electricity company—they bought our stake. I couldn’t figure out what they were doing, and I recently heard that they had to sell out at half the price that they paid us. So you know those are two things we look at.
MS: Concerns about getting money out of China was a question that’s come up with mainland Chinese companies being added to the MSCI Emerging Market Index. Now they’re being added to the index. Is that a concern?
Mark Mobius: I think the MSCI people are very aware of the risks. And look, China is now 26 per cent of the index already. I mean you can’t let it get too big because it overwhelms the whole index. This is what happened, by the way with the Frontier Markets Index.
But I must say the MSCI people have been careful about China. They’ve been very cautious, under tremendous pressure.
MS: So do you have any concerns with the liquidity issue?
Mark Mobius: Definitely, because the Chinese put a limit on how much you can take out. Now that limit is never being reached. I think it’s $300 million a day. No problem, but when there’s a crisis, you may want that money out. That’s the reason why I have been very cautious because they realize they have these restrictions.
MS: But is China still an emerging market?
Mark Mobius: Yeah, you see when we started in 1987, it was the IFC who defined emerging markets. It included all the countries in Asia except Japan, as well as New Zealand. It included all of Africa, of course and included, interestingly enough, Greece and Portugal. They included all of that and America from Mexico down.
So but over the years, you had Korea coming up in per capita income. You had Taiwan coming up in per capita. Singapore of course is right up there. Fortunately, Greece joined the European Union, although now Greece is back in the Emerging Markets Index, so they have real struggles on how to handle this. And of course the defining characteristic of an emerging market is growth. The average growth for emerging markets is about four percent compared to about one percent for the developed countries. And then you have countries like China and Korea—China and India that are growing at six, seven percent.
So I think eventually you’re going to see an evolution of the definition into high growth countries.
MS: To come at this another way, while China is an emerging economy in GDP terms, the country is home to some extremely large companies. Should companies this size belong in an emerging market index?
Mark Mobius: You must separate the definition of an emerging market country and an emerging market stock because there are many stocks listed in Canada, New York, London, that are emerging market stocks because most of their earnings are in emerging markets. Unilever’s one of our big holdings. Why? Because I’m talking about Unilever in London, not Unilever in India or Unilever in Nigeria. Originally, we just limited everything to companies that were listed in emerging markets stock markets. Now that’s gone out.
MS: African countries get thrown into that mix as well.
Mark Moebius: Definitely. African countries would be a big part of that, but of course if you’re basing it on market capitalization and free flows, Africa would be small with the exception of South Africa and maybe Nigeria. So I think that’s what we’re eventually going to evolve towards, that kind of a definition, but it hasn’t happened yet.
MS: Where is the next best opportunity?
Mark Mobius: Longer term, Africa. It’s the landmass. We have a list of countries in which you could fit Africa. It includes the U.S., China. You could fit into this continent of Africa a whole list of countries. It’s huge, and you know, a lot of people think about Africa of natural resources. It’s got human resources. Africa could become a big manufacturing centre.
MS: It’s taking jobs from China.
Mark Mobius: Yeah, exactly. Gradually, they’re going to see more and more of that. So I would say it has to be Africa.
MS: But how do you invest in Africa?
Mark Mobius: We are investing in Kenyan companies, in Ivory Coast, in Nigeria, Zimbabwe even. We’re investing in Zimbabwe. You know, here’s an interesting thing. Zimbabwe, the currency is the U.S. dollar, so you know, no problem. No currency risk. So you have this kind of situation, but you’ve got to be very flexible, and I mean for a while we couldn’t get money out of Nigeria because the oil revenue came down. They ran out of foreign exchange, but I would say it’s got to be Africa. The combination of natural resources, human resources, and by the way, Africa will become a big breadbasket for the rest of the world. You know, think about it, what they can grow, the land that they have. It’s incredible.
MS: Where does Canada fit into all of this?
Mark Mobius: NAFTA is not going to go away. You’re going to continue having tremendous trade with the U.S. To the degree to which Trump is successful in growing the U.S., Canada will benefit. But I also believe that at the end of the day Canada is becoming less and less dependent upon resources. I think there’s the other factors coming into play—tourism, service industries, computer, you know, software, all the rest of that. I know that’s – I haven’t seen the numbers, but I suspect that’s a trend that is going to – you’re going to see going forward. You’re going to see more of that sort of thing and less dependence upon the commodities.
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