Tuesday, April 14, 2009 5 comments ++[ CLICK TO COMMENT ]++

Opinion: Is Mark Mobius overrated?

Just asking... I don't really follow him or know much about him... The Globe & Mail had a story on him...

Question: You've had stellar returns in some years and losses in others. Over 15 years, your average annual return is 2 per cent in Templeton emerging markets. Should investors try to time these markets?

Mobius: I'd advise dollar-cost averaging. Don't put everything in at once so you get a good price in the up and down markets. You have to hopefully come in when everybody else is selling. That is the best thing.

But if you look at the average return for our emerging markets fund from inception [in 1991], it's 5 per cent. And that is not bad. If you were to come in when things were bad and the prices were down, you would have done even better than that.


I don't know what the emerging market index posted during that time but in absolute terms, 5% is very poor. That's roughly what long bonds produce*. Yes, the Asian Tigers blew up and Latin America faced numerous crises but emerging markets are supposed to account for that risk.

I have a suspicion that investors in the over-glorified BRIC--Brazil, Russia, India, China--will underperform old economy Europe for the next decade or more. Just a guess and haven't done any work but that's what I'm thinking right now. On top of one of those countries blowing up** and taking down anyone nearby, valuations are high***.


(* But if you purchased long bonds in the last few decades, you would have done much better.)

(** Consensus seems to be that Russia has the highest chance of blowing up but I feel it is China, followed closely by India. The safest seems to be Brazil.)

(*** Historically, high valuations have almost always generated poor returns. China and India were trading at really high P/Es over the last 5 years. Brazil and Russia also seem overvalued with very low P/Es (both of these have high exposure to commodity cyclicals and hence a low P/E is not necessarily cheap.) Right now the valuations don't see so high but it's difficult for me to say given how profitability has likely weakened. Although one shouldn't paint with a broad brush, it is also rare to see "popular themes" yielding high returns to many--except for those lucky or skilled enough to get on the train long before others. Even people who know little about investing (i.e. neither professional or amateur investors) often say that the best countries to invest in are China and India.)

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5 Response to Opinion: Is Mark Mobius overrated?

MrParkerBohn
April 16, 2009 at 4:19 AM

I don't know beans about Mobius, but obviously emerging markets are compelling.
 
Let's just take a look India vs the US (all figures from Wikipedia)
 
US population = 4.5% of world population.
India population = 17% of world population.
 
US GDP = $47025 per capita
India GDP = $941 per capita (based on exchange rates) $2563 per capita (based on purchasing power).
 
US median age = 35.3 (2000 census data)
India median age = 25.1
 
US GDP growth (annualized 4th quarter 2008) = -6.3%
India GDP growth (annualized 4th quarter 2008) = +5.8%
 
A clear picture emerges.  India is a poor, populous, young, fast-growing nation.
The US is a rich, aging, slow-growing (well, currently shrinking) nation.
 
It is not absurd to imagine India's economy being 10x larger in a few decades.  Indeed, that is what it may take to lift a few hundred million people out of poverty and into the global middle class.
 
I cannot even imagine the US economy being 10x larger.  What does a per capita income of $470,000 even look like?
 
It seems clear to me that the VALUE of the Indian economy will grow much faster in the next few decades than the VALUE of the US economy.
 
The other half of the equation of course is PRICE. 
This is a harder nut to crack, and I'll post on it later.

Sivaram
April 16, 2009 at 8:53 PM

I should probably write a post on this, with some research, because it is such an important point... but for now, here is a response...
 
I agree with all the statistical data that you provide. No arguments there. Yet there is a big flaw in the final conclusion--a flaw that have plagued growth investors.
 
 
 
"US GDP growth (annualized 4th quarter 2008) = -6.3%  
India GDP growth (annualized 4th quarter 2008) = +5.8%  
   
A clear picture emerges.  India is a poor, populous, young, fast-growing nation.  
The US is a rich, aging, slow-growing (well, currently shrinking) nation.  "
 
The risk here is that the growth rates may turn out to be inaccurate. In fact, one of the reasons I am not so bullish on the high growth emerging markets, such as India, but also China, Brazil, and others, is because these growth rates make no sense.
 
It would be almost impossible for a country to grow, say, 7% to 10% for a long period of time. In fact, I am skeptical that China actually grew at literally 10% for many decades.
 
USA was the greatest emerging market in the late 1800's and early 1900's. There was almost no country like that in the last 500 years. Yet, it barely grew at 10% for a decade. Guess what it's GDP growth rate was during the Roaring 20's? Believe it or not, it was 3.4% real (and 3% nominal)!!! Admittedly, this was after USA became slightly wealthier and larger but it still gives an indication of the growth rate during what is considered a massive boom in the economy, stock market, wealth, standard of living, and everything else. Its growth rates in the earlier periods was slightly higher (e.g. 1900 to 1910 at 3.9% real and 5.3% nominal) but it's still very high.
 
China has supposedly posted 10% real growth (around 18% to 20% nominal depending on the inflation rate) for a few decades. India has posted about 7% for many years now (nominal around 12% to 15% I believe)--need to check all these numbers.
 
 
 

Sivaram
April 16, 2009 at 8:54 PM

I have to say that there is no way India, China, and others, will grow anywhere near the current rate in the future. If anything, it will get tougher and tougher. On top of most of the easy development (e.g. building a road or housing) being done, there will be issues related to war, famine, and so on. China, for instance, has done many of the easy things that can be done. Sure, there is still the rural majority but, remember, some areas will always lag (in USA, rural areas did not get electricity service, paved highways, indoor plumbing, for a while.) India is far behind China so its growth can be better. In either case, anything over 5% is a miracle, which is another word for unsustainable!
 
Even if what you are saying comes true, it will take much longer than most assume. Instead of something taking 20 years, it could take 50 years; instead of 50 years, it might take 80 years. China's demographics is also poor so it will get harder and harder as the years roll by (India's demographics is better but it has very serious problems with illiteracy, gender discrimination, discrepancy in wealth, corrupt politics, and so forth.)

MrParkerBohn
April 17, 2009 at 9:14 AM

I essentially agree with everything you have said, and still think that emerging markets look compelling, at least in relative terms.
 
Obviously, the 'shoot-the-moon' type person who actually thinks that India will log a compounding 10% per year growth has no grasp of what that number means.  That would put their economy at 117 times its current size in 50 years!
 
But based on the kind of demographics I posted above, I would expect growth in India to easily outpace growth in the US over the next few decades.
 
The crucial question of course is price.
This site puts India's NSE Nifty 50 at a PE of 13.4
http://www.equitymaster.com/india-markets%5Cnse-replica.asp
Reuters puts the S&P 500 at a PE of 14.2
 
There are some issues with these kinds of PE numbers, but they seem to show that Indian stocks are priced around the same as US stocks.  So for the same price I get higher expected growth, international diversification, and stocks denominated in (I believe) an undervalued currency.
 
I've used India as an example, but similar logic holds for other emerging markets, many of which look cheap to me relative to their growth potential.  Before the crash last October, I had 5% of my assets in emerging markets (which was 5% too much, I'm sorry to say).  With many emerging markets down 50% from their high, I now have about 25% of my portfolio in emerging markets.
 
I own EPI (india), GXC (china), DEM (emerging markets), & DGS (emerging markets small cap)
 
My logic on valuations and demographics looks sound to me, but please let me know if you think I've missed anything.
Thanks.

Sivaram
April 17, 2009 at 10:27 AM

I think investing now is more attractive than at any point in the last 3 or 4 years. I remember when India and China had P/Es over 30 (I believe) last year and that was way too high. No wonder the Shanghai market completely collapses; similarly, India seemed high in the last few years. The problem with Indian stocks, from what I understand, is that they have capital controls. Indian stocks listed on NYSE used to trade at huge premiums to their locally-listed stocks a few years ago. I'm not sure if that's still the case. I'm also not sure how much flexibility ETFs have in investing in the local market.
 
 
Right now, the valuations are not high. They are not cheap either though. Some would disagree with me and say the valuations are low relative to their growth potential. That is probably true but if you consider political risk, currency risk, taxes, and so forth, they are not cheap. But it depends on the risk you ascribe to these factors. For instance, I think there is high risk of a political crisis in China but many, including successful investors such as Jim Rogers, don't think too much of it. Conversely, I am relatively bullish on the US$ (at least until the world economy recovers) whereas many are very bearish.
 
Basically, I would say they are attractive and if you can pick good companies but I'm still not sure they will outperform the US. American companies are far more shareholder-friendly and have high return on equity. But if things go right (i.e. no political crisis, no rolling back reforms, etc), I think emerging markets can outperform.
 
For what it's worth, Jeremy Grantham, expects emerging markets to beat US stocks over the next 7 years. So you are in good company :)
 
 

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