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Invest In Emerging Markets

Mark Mobius, the chairman of Templeton EM group, has made a strong pitch for EMs…

Most international investors allocate 3 to 8 per cent of their portfolio to emerging markets (EM). In future, interest in EMs is likely to grow stronger rather than weaker. What gives international investors the confidence to invest in EMs is the fact that these countries have ample foreign reserves and low debt. China has the largest foreign exchange reserves at $2 trillion, followed by Japan at $1.09 trillion. Russia and India occupy the third and fourth spots with $400 billion and $300 billion respectively.

Moreover, EMs’ debt-to-GDP ratio has come down while that of developed countries has gone up. Inflation has declined over the past decade, and interest rates have also followed suit. All of these have contributed to a conducive environment for rapid growth of businesses.

Further, since 1988, EMs have witnessed just three bear markets and that too for very short durations. On an average, during a bull run markets have gone up by over 400 per cent, whereas during bear markets they have on average declined by just 57 per cent. It is this experience that makes EMs so attractive.

In recent times, EMs may have performed in line with developed markets. But over longer time horizons like five or 10 years, they have comprehensively outperformed them. Now it’s the EMs that boast of a thriving initial public offer (IPO) market. Back in 2001, their IPO market represented 10 per cent of the total world IPO market, now it is at least 50 per cent, even overshadowing the IPO market in the US.

Outlook for 2011
This year EMs are expected to grow at an average rate of 5.9 per cent vis-à-vis a growth rate of 1.6 per cent in developed countries. India and China will be the drivers of this growth. Beyond these mainstream economies, international investors could also now venture into smaller countries, especially in Africa, which are registering double-digit growth.
Optimistic growth projections in EMs are supported by leading indicators like the purchasing managers index (PMI). A glance at the PMI shows that the growth momentum is back in these economies. During the subprime crisis, the rates of credit default swaps (CDS), which are insurance policies on sovereign debt, rose, indicating a lack of confidence. Now these rates are declining.
As for valuations, EMs are trading at a price-earning (P/E) ratio of 11 to 12 times, compared to their past low of 7 and high of 28. Thus, today these markets are not cheap, but neither are they so expensive that investors should shy away from them.

Themes to bet on
Consumables: There are more than five billion consumers in EMs compared to one billion in developed markets. Their sheer numbers and the rate at which their spending power is growing is having a positive impact on the consumer goods segment. Their incomes may be lower than those of consumers in developed countries, but they are growing at a faster rate. Between 2005 and 2010 per capita income of consumers in EMs increased 87 per cent.
In 1991 China accounted for less than 1 per cent of total global imports; now it accounts for more than 9 per cent. In China bicycle sales are declining while sale of automobiles is rising, faster than in the US. In India in 2008, only 30 out of 100 households had washing machines; now that figure has risen to 49.
Commodities: The best commodity to bet on is oil, followed by iron ore, copper, platinum, palladium, coal, and nickel. The recent run up in commodity prices is expected to continue, although with a lot of volatility. The share of EMs in import of these commodities is rising. In 2009, EMs imported 47 per cent of world crude oil, up from 36 per cent in 2005.

Mobius on India
In 2010, India’s economy grew by 9.7 per cent. For 2011, the International Monetary Fund (IMF) predicted a GDP growth of 8.4 per cent. However, many do not realise that this fast pace of growth is not new. From 2005 to 2010, India’s economy grew at around 6-8 per cent each year, an impressive feat for such a large economy. The Economic Intelligence Unit (EIU) forecasts that India’s GDP will grow at an average rate of 6.5 per cent per year between 2011 and 2030, which would make it the fastest-growing economy in the world during that period.
Some of the key drivers for India’s strong growth include rising per-capita income, robust domestic demand, and more consumption by a growing middle class. Its strength is its young, growing, and increasingly well-educated population, which is fluent in English, and which has enabled the country become a leader in IT consultancy and other service sectors.

(Complied from Mark Mobius's presentation in Delhi on his recent visit and from his blog mobius.blog.franklintempleton.com)