PAGE FRIDAY, AUGUST 31, 2007 Equities Emerging Markets …...any time. However, the good news is...
1
By Mark Mobius Managing Director of Templeton Asset Management R ecently, we have seen volatility across emerging markets and investors rush to raise cash in an effort to reduce their exposure to these markets. Given the rout in global emerg- ing stock markets we’re witness- ing today, I’m not very worried because this is not the first time markets have corrected or that we’ve witnessed uncertainty in the markets. Investors should expect volatility, as is the nature of any stock market, but we expect long-term investors to be rewarded. It’s impossible for anyone, regardless of how much experi- ence they have in stock markets, to predict exactly how much a market is going to decline before it turns around. No one can pre- dict the market direction and a bear or bull market could start at any time. However, the good news is that bear markets are shorter in duration than bull markets and bear markets go down a smaller percentage than bull market increases. This is why one must invest with a long- term view. The current market decline is not comparable to the Asian Financial crisis of July and Octo- ber 1998 for the simple reason that Asian markets, and for that matter most emerging markets, are in a much better position than they were about 10 years ago. The crisis in 1997/8 began in Asia and spread globally. Currently, however, Asian economies are better equipped that they were 10 years ago to weather any global issues/slow- down as many have abandoned their pegged exchange rates, decreased short-term debt and built up large current account surpluses and foreign exchange reserves. Most Emerging markets are in fact now benefiting from stronger economic growth, rela- tively lower inflation and interest rates, the implementation of effective fiscal and monetary policies, stable political environ- ments, improving corporate gov- ernance, the enhancement of competitiveness through removal of subsidies and reduction of trade barriers, higher productivi- ty and consumption because of a younger and better trained labor force, and so forth. Asia is the largest emerging markets region in the world and home to some of the fastest growing economies globally. In fact, more than 50 percent of the world’s population lives in Asia providing the region with a huge consumer base. One of the key supporting fac- tors for investing in Asia is its robust economic growth. Asian economies have not only been growing faster than developed countries in North America, Western Europe, Japan, Aus- tralia and New Zealand but also their emerging markets counter- parts. Over the last ten years, Emerg- ing Asia has recorded an average annual growth of 7.3 percent, compared to 2.7 percent for developed markets and 5.8 per- cent for global emerging markets. Moreover, economists expect this growth trend to continue for the foreseeable future. Emerging Asia is expected to grow 8.8 per- cent this year, more than triple the developed markets’ 2.5 per- cent forecast. And in line with that, the earnings growth in Emerging Asia is expected to be much stronger than that in the developed world. Asia’s economic growth has also been supported by the region’s export growth momen- tum and more recently by grow- ing consumer demand. In addition, dependence on the U.S. as an export outlet has been decreasing in the region. Japan and China’s role as outlets for exports from the rest of Asia also needs to be underlined. In addi- tion, lower labor costs allow Asian markets to undertake competitive pricing to boost exports. Fundamentals Remain Intact One of the main investment themes in Asia is increasing con- sumption. As a result of increasing per capita incomes and relatively young population structures, Asian economies are increasing domestic consumption of a wide range of goods. For example, in India and China, the number of cellular phone subscribers per 100 people in 2006 was 13 and 35, respectively. While in developed markets such as the UK and U.S., it was 117 and 77, respectively. Thus, the potential for growth is enor- mous, with this growing demand expected to further boost domes- tic consumption and industrial output, leading to greater corpo- rate earnings in the region. Commodities have also been an important driver in Asia, given the increased demand from Asian industries. This growing demand is expected to further boost domestic consumption and industrial output. Additionally, we’ll see countries in Asia converging more and more as they increase trade with each other. We see this growth in the trade that Taiwan and Korea are experiencing with China. Moreover, companies with good corporate governance can be expected to attract greater investor interest. As a result of corporate scandals in the U.S. and other developed markets, Asian markets are no longer per- ceived in such a poor light com- pared to developed markets in this regard. More importantly, global investors’ heightened awareness of corporate governance, has forced Asian companies to improve their standards. While some improvement has been seen, there is still a lot to be done and we expect to see continued progress in the future. My advice to emerging market investors would be not to panic for recent volatility. It is very easy for us to be caught up in emotions or simply follow the herd. I would suggest that investors take a long-term view to invest- ing and carefully evaluate their options. History has shown us that the best time to buy is when everyone is despondently selling. This enables us to pick up stocks at more attractive prices. The best strategy would be to remain diversified rather than pick one or two countries in the emerging market universe, since it would be difficult to know which market will outperform. Thus, maintaining a diversified portfolio will allow an investor to better manage his/her risk levels. Also, value is the key. The best protection is to select companies that are selling at a discount to what they are really worth and companies with good manage- ments capable of realizing the firm’s intrinsic value. Templeton’s value investing strategy serves our investors well in these times of volatility as we invest in undervalued opportuni- ties and adhere strictly to our value philosophy. Our invest- ment strategy is focused, deter- mined and constant. It is found- ed on value, patience and funda- mental research. Companies are evaluated on a five-year investment horizon with a focus on long-term poten- tial, and not on short-term fluctu- ations. This also means that we do not “chase” stocks; rather, we allow undervalued securities time to appreciate as they gain recognition by the market. The markets may continue to be volatile at times, but the underlying fundamentals of emerging markets remain in tact. Real Estate Bubble: Real and Imaginary By Mauro F. Guillen Director of Lauder Institute at Wharton School C haracteristically, they are based on assump- tions that at some point turn out to be unrealistically opti- mistic or otherwise at odds with a supposedly “hard’’ reality. When a bubble finally bursts, people always ask two questions. First, why did it last so long? And second, why are the effects so severe? Obviously, the two are related to one another. Of all bubbles, those involving real estate have the potential of lasting for a long time and hav- ing devastating effects. The reasons are that people tend to be extraordinarily opti- mistic about real estate prices, they tend to participate in the creation of the bubble with bor- rowed money, and when the first signs of trouble appear, it is always easy for new buyers to wait and see, thanks to the exis- tence of a relatively well- functioning rental market. Much has been written recently about the existence of real estate bubbles in sev- eral European, Asian and North American markets. Central banks, govern- ments, international agen- cies, lenders and mere observers have pointed out that the combination of sev- eral years of hefty price increases and tighter credit conditions as of recent might bring about a self-reinforcing spiral of decline in real estate prices. While I do not wish to ignore the signs of trouble ahead, it is important to put things in perspective. The market for real estate is a peculiar one. People buy real estate because they need a place to live or to vacation. They also buy it as a store of value or, yes, to specu- late. Moreover, in some economies, the real estate sector has come to play a very important macroeco- nomic role. Cheap credit guaranteed by real estate has made it possible for people to leverage themselves as investors or as consumers. In the United States, the on- going subprime crisis is scary because so much economic activ- ity is driven by consumption itself fueled by borrowing against real estate assets. As a recent study by the Inter- national Monetary Fund states, one should only be concerned about rising real estate prices when incomes do not grow at the same pace. Between 1999 and 2006 real estate prices in the U.S. rose by about 6 percent annually. Incomes rose by just about 2 per- cent annually over the same period. Given that foreign purchasers of U.S. real estate account for only a tiny fraction of all transactions, the trend cannot be sustained, especially now that credit is not as cheap as a few years ago. In most East Asian countries, by contrast, incomes have grown faster than real estate prices. For instance, over the same time period, China saw an annu- al hike of 2.6 percent in real estate and a whopping 9.5 per- cent in incomes. In South Korea, the correspond- ing figures were 2.2 and 3.7 per- cent. True, during 2006 prices went up by 12 percent, and by as much as 20 percent in the Seoul area. Based on this figures, The Economist magazine declared that the fear of a real estate bub- ble in much of Asia is exaggerat- ed. Reasonable people may look at the same set of figures and reach different conclusions, depending on their assumptions about future trends and events and on their attitude towards risk. I believe that in a country like South Korea the most serious risk right now is not so much that there might be a correction in real estate prices but rather that the government and key economic agencies might overre- act to the threat. Although inflation remains low, the Bank of Korea seems to be inclined to raise interest rates at the first sign of trouble. Such a move would increase payments on existing loans and depress asset prices. As a side effect, it might reduce consumption enough to affect the rate of GDP growth. At a time when the South Korean economy is grow- ing more slowly than it used to, the central bank needs to care- fully weigh the consequences of its actions. Governments, including the South Korean one, can also change regulations, espe- cially taxes, in order to ensure a soft landing of real estate prices. An important factor to keep in mind when design- ing such regulatory changes is to aim at the right target. Changes in taxes or real estate rules should not dis- courage first-time home- buyers; they should target speculators. But they should be carefully cali- brated so that even specu- lators in real estate have a way out. Eradicating spec- ulation in the short run causes a bubble market to crash. The change has to be gradual so that all actors involved can adjust. Perhaps the most important role the government can play in the middle of a real-estate bub- ble is to ensure that banks are making the appropriate provi- sions to protect themselves against the potential negative impact of non-performing loans. As long as profits during good times are set aside to cover loss- es during bad ones, the financial system will remain a solid pillar of economic growth. This should be the utmost priority. Hence, governments and government agencies need to carefully assess the combination of measures — monetary, regulatory and others — that facilitate the smooth development of markets, includ- ing the market for real estate. Mauro F. Guillen Bubble Essential Part of Market Economy Emerging Markets to Reward Long-Term Investors Mark Mobius 4 FRIDAY, AUGUST 31, 2007 Equities PAGE
Transcript of PAGE FRIDAY, AUGUST 31, 2007 Equities Emerging Markets …...any time. However, the good news is...
By Mark Mobius
Managing Director
of Templeton Asset Management
Recently, we have seenvolatility acrossemerging marketsand investors rush toraise cash in an effort
to reduce their exposure to thesemarkets.
Given the rout in global emerg-ing stock markets we’re witness-ing today, I’m not very worriedbecause this is not the first timemarkets have corrected or thatwe’ve witnessed uncertainty inthe markets. Investors shouldexpect volatility, as is the natureof any stock market, but weexpect long-term investors to berewarded.
It’s impossible for anyone,regardless of how much experi-ence they have in stock markets,to predict exactly how much amarket is going to decline beforeit turns around. No one can pre-dict the market direction and abear or bull market could start atany time. However, the good
news is that bear markets areshorter in duration than bullmarkets and bear markets godown a smaller percentage thanbull market increases. This iswhy one must invest with a long-term view.
The current market decline is
not comparable to the AsianFinancial crisis of July and Octo-ber 1998 for the simple reasonthat Asian markets, and for thatmatter most emerging markets,are in a much better position thanthey were about 10 years ago.
The crisis in 1997/8 began inAsia and spread globally.
Currently, however, Asianeconomies are better equippedthat they were 10 years ago toweather any global issues/slow-down as many have abandonedtheir pegged exchange rates,decreased short-term debt andbuilt up large current accountsurpluses and foreign exchangereserves.
Most Emerging markets are infact now benefiting fromstronger economic growth, rela-tively lower inflation and interestrates, the implementation ofeffective fiscal and monetarypolicies, stable political environ-ments, improving corporate gov-ernance, the enhancement ofcompetitiveness through removalof subsidies and reduction oftrade barriers, higher productivi-
ty and consumption because of ayounger and better trained laborforce, and so forth.
Asia is the largest emergingmarkets region in the world andhome to some of the fastestgrowing economies globally. Infact, more than 50 percent of theworld’s population lives in Asiaproviding the region with a hugeconsumer base.
One of the key supporting fac-tors for investing in Asia is itsrobust economic growth. Asianeconomies have not only beengrowing faster than developedcountries in North America,Western Europe, Japan, Aus-tralia and New Zealand but alsotheir emerging markets counter-parts.
Over the last ten years, Emerg-ing Asia has recorded an averageannual growth of 7.3 percent,compared to 2.7 percent fordeveloped markets and 5.8 per-cent for global emerging markets.
Moreover, economists expectthis growth trend to continue forthe foreseeable future. EmergingAsia is expected to grow 8.8 per-cent this year, more than triplethe developed markets’ 2.5 per-cent forecast. And in line withthat, the earnings growth inEmerging Asia is expected to bemuch stronger than that in thedeveloped world.
Asia’s economic growth hasalso been supported by theregion’s export growth momen-
tum and more recently by grow-ing consumer demand.
In addition, dependence on theU.S. as an export outlet has beendecreasing in the region. Japanand China’s role as outlets forexports from the rest of Asia alsoneeds to be underlined. In addi-tion, lower labor costs allowAsian markets to undertakecompetitive pricing to boostexports.
Fundamentals Remain Intact
One of the main investmentthemes in Asia is increasing con-sumption.
As a result of increasing percapita incomes and relativelyyoung population structures,Asian economies are increasingdomestic consumption of a widerange of goods. For example, inIndia and China, the number ofcellular phone subscribers per100 people in 2006 was 13 and35, respectively.
While in developed marketssuch as the UK and U.S., it was117 and 77, respectively. Thus,the potential for growth is enor-mous, with this growing demandexpected to further boost domes-tic consumption and industrialoutput, leading to greater corpo-rate earnings in the region.
Commodities have also been animportant driver in Asia, giventhe increased demand fromAsian industries. This growing
demand is expected to furtherboost domestic consumption andindustrial output.
Additionally, we’ll see countriesin Asia converging more andmore as they increase trade witheach other. We see this growth inthe trade that Taiwan and Koreaare experiencing with China. Moreover, companies with good
corporate governance can beexpected to attract greaterinvestor interest. As a result ofcorporate scandals in the U.S.and other developed markets,Asian markets are no longer per-ceived in such a poor light com-pared to developed markets inthis regard.
More importantly, globalinvestors’ heightened awarenessof corporate governance, hasforced Asian companies toimprove their standards. Whilesome improvement has beenseen, there is still a lot to be doneand we expect to see continuedprogress in the future.
My advice to emerging marketinvestors would be not to panicfor recent volatility. It is veryeasy for us to be caught up inemotions or simply follow theherd.
I would suggest that investorstake a long-term view to invest-ing and carefully evaluate theiroptions. History has shown usthat the best time to buy is wheneveryone is despondently selling.This enables us to pick up stocks
at more attractive prices. The best strategy would be to
remain diversified rather thanpick one or two countries in theemerging market universe, sinceit would be difficult to knowwhich market will outperform.
Thus, maintaining a diversifiedportfolio will allow an investor tobetter manage his/her risk levels.Also, value is the key. The bestprotection is to select companiesthat are selling at a discount towhat they are really worth andcompanies with good manage-ments capable of realizing thefirm’s intrinsic value.
Templeton’s value investingstrategy serves our investors wellin these times of volatility as weinvest in undervalued opportuni-ties and adhere strictly to ourvalue philosophy. Our invest-ment strategy is focused, deter-mined and constant. It is found-ed on value, patience and funda-mental research.
Companies are evaluated on afive-year investment horizonwith a focus on long-term poten-tial, and not on short-term fluctu-ations. This also means that wedo not “chase” stocks; rather, weallow undervalued securitiestime to appreciate as they gainrecognition by the market.
The markets may continue tobe volatile at times, but theunderlying fundamentals ofemerging markets remain intact.
Real Estate Bubble: Real and Imaginary
By Mauro F. Guillen
Director of Lauder Institute
at Wharton School
Characteristically, theyare based on assump-tions that at somepoint turn out to beunrealistically opti-
mistic or otherwise at odds witha supposedly “hard’’ reality.
When a bubble finally bursts,people always ask two questions.First, why did it last so long?And second, why are the effectsso severe?
Obviously, the two are relatedto one another.
Of all bubbles, those involvingreal estate have the potential oflasting for a long time and hav-ing devastating effects.
The reasons are that peopletend to be extraordinarily opti-mistic about real estate prices,they tend to participate in thecreation of the bubble with bor-rowed money, and when the firstsigns of trouble appear, it isalways easy for new buyers towait and see, thanks to the exis-tence of a relatively well-functioning rental market.
Much has been writtenrecently about the existenceof real estate bubbles in sev-eral European, Asian andNorth American markets.
Central banks, govern-ments, international agen-cies, lenders and mereobservers have pointed outthat the combination of sev-eral years of hefty priceincreases and tighter creditconditions as of recent mightbring about a self-reinforcingspiral of decline in real estateprices. While I do not wish toignore the signs of troubleahead, it is important to putthings in perspective.
The market for real estateis a peculiar one.
People buy real estate becausethey need a place to live or tovacation. They also buy it as astore of value or, yes, to specu-late.
Moreover, in some economies,the real estate sector has come toplay a very important macroeco-nomic role. Cheap credit guaranteed by real
estate has made it possible forpeople to leverage themselves asinvestors or as consumers.
In the United States, the on-going subprime crisis is scarybecause so much economic activ-ity is driven by consumptionitself fueled by borrowing againstreal estate assets.
As a recent study by the Inter-national Monetary Fund states,one should only be concerned
about rising real estate priceswhen incomes do not grow atthe same pace.
Between 1999 and 2006 realestate prices in the U.S. rose byabout 6 percent annually.Incomes rose by just about 2 per-cent annually over the sameperiod. Given that foreign purchasers of
U.S. real estate account for only atiny fraction of all transactions,the trend cannot be sustained,especially now that credit is notas cheap as a few years ago.
In most East Asian countries,by contrast, incomes have grownfaster than real estate prices.
For instance, over the sametime period, China saw an annu-al hike of 2.6 percent in realestate and a whopping 9.5 per-cent in incomes. In South Korea, the correspond-
ing figures were 2.2 and 3.7 per-cent.
True, during 2006 prices wentup by 12 percent, and by asmuch as 20 percent in the Seoularea. Based on this figures, TheEconomist magazine declaredthat the fear of a real estate bub-ble in much of Asia is exaggerat-
ed. Reasonable people may look at
the same set of figures and reachdifferent conclusions, dependingon their assumptions aboutfuture trends and events and ontheir attitude towards risk.
I believe that in a country likeSouth Korea the most seriousrisk right now is not so muchthat there might be a correctionin real estate prices but ratherthat the government and keyeconomic agencies might overre-act to the threat.
Although inflation remains low,the Bank of Korea seems to beinclined to raise interest rates atthe first sign of trouble. Such amove would increase paymentson existing loans and depressasset prices. As a side effect, itmight reduce consumptionenough to affect the rate of GDPgrowth. At a time when theSouth Korean economy is grow-ing more slowly than it used to,the central bank needs to care-fully weigh the consequences ofits actions.
Governments, including theSouth Korean one, can alsochange regulations, espe-cially taxes, in order toensure a soft landing ofreal estate prices.
An important factor tokeep in mind when design-ing such regulatorychanges is to aim at theright target.
Changes in taxes or realestate rules should not dis-courage first-time home-buyers; they should targetspeculators. But theyshould be carefully cali-brated so that even specu-lators in real estate have away out. Eradicating spec-ulation in the short runcauses a bubble market tocrash. The change has to
be gradual so that all actorsinvolved can adjust.
Perhaps the most importantrole the government can play inthe middle of a real-estate bub-ble is to ensure that banks aremaking the appropriate provi-sions to protect themselvesagainst the potential negativeimpact of non-performing loans.
As long as profits during goodtimes are set aside to cover loss-es during bad ones, the financialsystem will remain a solid pillarof economic growth. This shouldbe the utmost priority. Hence,governments and governmentagencies need to carefully assessthe combination of measures —monetary, regulatory and others— that facilitate the smoothdevelopment of markets, includ-ing the market for real estate.
Mauro F. Guillen
Bubble Essential Part of Market Economy
Emerging Markets to Reward Long-Term Investors
Mark Mobius
4 FRIDAY, AUGUST 31, 2007 EquitiesPAGE
