Bloomberg: Welcome back to Bloomberg Television. A weaker dollar has made Americans, who invest overseas, richer, while making foreign investors, who invest in the U.S., poorer. Our next guest manages $7 billion in emerging markets and is familiar with the risk currencies carry when investing overseas. He is Mark Mobius, managing director at Franklin Templeton Investments, and it is a great pleasure to have you with us.
Mark Mobius: Thank you.
Bloomberg: Let's talk about the dollar. It's been in the headlines for days and days. We heard George Serif yesterday say he sold dollars when U.S. Secretary of the Treasury John Snow effectively said it was okay with him that the dollar softened. In fact, Serif said it's a beggar your neighbor policy. Would you agree?
Mobius: Not really, because I think the idea of letting the currency float and move to its own rhythm is good. I think more countries should do that. I think one of the problems we face globally is the fact that currencies have been controlled by governments, and the Thai baht disaster, which caused or initiated the Thai crisis and then moved on to the rest of Asia, was really caused by control of the currency.
Bloomberg: We still see rather dramatic moves in the dollar. We all, because we're here in New York, have been pretty focused on the dollar-euro, dollar-yen transaction. You have a much broader world view. How have these dramatic moves in the dollar versus everything changed your investment decisions?
Mobius: In Asian countries, it's been pretty good because the Korean won, the New Taiwan dollar, the Hong Kong dollar and the Chinese renminbi are more or less tied to the U.S. dollar. The governments in those countries have tried to keep their currencies tied to the U.S. dollar. So a weakening dollar helps their export abilities because it means, of course, the U.S. exports don't suffer, but they're more competitive in other parts of the world such as Europe.
Bloomberg: You're not primarily a currency investor. You're primarily talking about stocks in companies all over the world.
Mobius: That's right. But we do look at currencies as well. In the case of Eastern Europe, currencies are generally overvalued, but they're moving with the euro. At least temporarily they're okay because the flows of funds going to Eastern European countries have grown as a result of this pending association with the European Union. By going further along, this gap in valuation is a dangerous part of these countries.
Bloomberg: And what about commodities? They trade with the dollar. How does that play into your thinking?
Mobius: In the case of commodities, a lot of the countries like Brazil and South Africa are being impacted. The rand has appreciated dramatically against the U.S. dollar. So I would expect that there may be some problems going forward on exports, but it's not going to be very significant, at least not yet.
Bloomberg: Let's do a little area-specific talking—Latin American stocks, among the world's best performers this quarter, Argentina's Merval, Peru's not too far behind. Is that something you would expect to continue?
Mobius: I think the situation in Latin America is going to look a lot better going forward, and we've seen a big move in Brazil, which really led what was happening. Argentina's small so it's not surprising that a small amount of money pushes prices up pretty dramatically there. Brazil is a different story. It's a bigger market, and the move there is significant and will likely impact the rest of Latin America.
But I think what you have to look at is the spread between the emerging markets debt, Brazilian debt and other emerging markets debt, and the U.S. debt —the U.S. interest rates. That's where it has narrowed the spread. And that has resulted in much, much more confidence in these countries like Brazil, even Argentina and the rest of Latin America. In addition, the low interest rates make it much easier for these countries to pay back debts, for companies to pay back the U.S. dollar debts. And so the overall impact is quite beneficial in the short term.
Bloomberg: Critics of Brazil are worried that the situation there; the euphoria about Brazil may be overblown. I think you're saying you're not one of them.
Mobius: Yes, I think it is true that if there is euphoria, it shouldn't be there because there's still a lot of danger and a lot of possibilities of them backtracking on reforms. But, unfortunately, the markets tend to overshoot, or fortunately, if you're invested in Brazil, the markets tend to overshoot, and I don't see that stopping soon because of this interest rate situation. Even if there is a fallback on the reforms, the flow of funds into these areas is increasing.
Bloomberg: Talk to us about Venezuela. It dropped from the FTSE All World Index. Are you invested there now?
Mobius: No, as soon as Venezuelan President Hugo Chavez came in, we got out. And we were quite lucky. Very often we would not look at the macro political situation, but in that case there appeared to be the possibility of a confiscation of assets. We got out. It's really not been a good situation. I don't think it's going to change anytime soon so we'd be very cautious of moving back in again.
Bloomberg: You anticipated me. I was going to ask you what it would take to move back in there. I guess it would take a great deal. Let me ask you one more thing about emerging markets. The bonds in emerging markets have done remarkably well, as you are well aware, year-to-date. Do you expect stocks to follow?
Mobius: Yes, in fact that is sort of a leading indicator. Again, the reason why emerging market bonds have done so well is the spread has come down, and those bonds have performed wonderfully well. I think, however, continued upside on bonds is going to be limited. We can't expect the same kind of moves that we've had in the last few years. It is a leading indicator for the equity markets. There are fundamental reasons for that because of the low interest rates that I mentioned just now, and the effects of that on these countries and companies. But I do think now money is going to start flowing into equities again.
Bloomberg: Would you take that home to our markets? Sounds pretty much like a situation we're in here where bonds have performed so well.
Mobius: To some extent. The problem I think in America is the valuation problem, as stocks in America are still relatively overvalued. Of course, there are many, many opportunities here. It is such a huge market. There are many good companies. But generally speaking, we have a big gap, at least with the emerging markets, beginning with the price of these ratios of U.S. and emerging markets.
Bloomberg: Let's talk a little bit about Asia. Last time you were with us, which was early April, you were in Hong Kong, and you were talking about China. You were very bullish on Chinese opportunities. Take SARS now, and work that into your investment thinking.
Mobius: If you look at SARS and the context of diseases worldwide, it's very, very small. The reality is that the number of deaths, the number of people infected is very small in relationship to pneumonia, in relationship to AIDS. The psychological impact is really what we're talking about: People are afraid. In Hong Kong, there was panic a few months ago. Now that's dying away. In other cases, it's decreasing.
The same thing in China—Taiwan is moving up on the SARS curve. I would think that in two or three months this will not be a big issue. And you're going to see people traveling again, so what we're doing is we're looking at the travel industry. We're looking at the airline industry, and we're saying now, "Where are these companies going to be in two, three, four, five years? Are they good bargains now?" Even if you say the next three months are a write-off, you're not going to make any money.
Bloomberg: How's Korea's SK Global? They just revisited 2002 earnings for the third time in 10 weeks, and they say it's due to faulty accounting. I guess the question is: Are you avoiding Korean stocks as a result?
Mobius: No, but of course we've been cautious for quite some time. Even with a company like Samsung Electronics, we've been very concerned about corporate governance and about the relationships between all of these subsidiaries. For example, Samsung Electronics owns a bank and a finance company.
We believe it is dangerous because it is not transparent. And of course, SK Global got hit and SK Corp.1, of course, as a result has been impacted. So we look at that, but we don't avoid the country because there are companies like Posco2, the big steel company. Companies like Korea Electric3 that we find attractive.
Bloomberg: Are there countries you would avoid simply because their governments are suspect or unreliable in some way? Are there simply places you will not go?
Mobius: Oh yes. There are a number of countries; Venezuela would be one, Nigeria would be another. There are a number of countries around the world where there is no law and order, so to speak, for the foreign investor at least. And we require some modicum of judicial system. We aren't saying we expect everything to be perfect, but there has to be some modicum of protection for investors.
Bloomberg: Let me ask you something you're very familiar with. Investor David Webb is pushing Asian companies to become more accountable. Is that working, and where are you in that? Are you a colleague?
Mobius: Well, I've worked with David on a number of cases. He's very good. He understands the law. He understands government regulations. He knows what points to attack. He's now joining the Board of the Stock Exchange, I believe, in Hong Kong. And I think he's doing a terrific job. I wish there were more people like him.
The only other person I can think equal to him would be Professor Jung in Korea who has started a group to go after corporate governance. He's done a very good job. Without these people, there's not going to be governance in these regions that is going to protect minority investors. It's going to be people like David and Professor Jung who really start acting legally against companies that violate shareholder rights.
Bloomberg: You're in an interesting position, of course, because there's so much money involved and so many conflicting interests to address. Have you all decided to take a position in a public way on your proxy voting or on the dividend tax?
Mobius: Oh, definitely. The recent U.S. proposal to cut tax on dividends is a wonderful thing. Not only for the U.S., but for other companies around the world. We're very active. We vote every time on proxy votes. We attend general meetings and shareholder meetings as much as we can.
Bloomberg: Making sure your tab is pretty clear.
Mobius: Oh, yeah. We're very active.
Bloomberg: Let me ask you about the legal dispute with Harvard endowment. I guess, in a nutshell, we can say that Harvard was urging an improvement in the stock pricing of two funds that were basically based in China that you manage. The two sides settled. So what effect does this have on your business, if any, and what can you tell us about flows?
Mobius: I can't talk about this settlement because we've signed an agreement, and I can't make any comment at all. But there's been no change in the way we do business. I mean, we're value investors. We believe that we have to serve the investors and give them the best value that we can. And we're going to continue to do that.
Bloomberg: Well, we could talk forever. Thank you very much for being with us on Bloomberg Television, Mark.
Mobius: Thank you very much.
Bloomberg: Mark Mobius, managing director of Templeton Asset Management.
Important Information
Reprinted with permission of Bloomberg Television.
The information provided in this piece is not a complete analysis of every material fact respecting any industry, security, mutual fund or investment. Opinions expressed by Mark Mobius are subject to change without notice. Statements of fact cited by Dr. Mobius have been obtained from sources considered reliable. No representation is made by Franklin Templeton Distributors, Inc., or its affiliates as to their completeness or to the accuracy of any statement or numerical data in the material. Performance information is historical and should not be considered predictive of future results. All securities investments fluctuate and involve risks.
Market and economic conditions are subject to rapid change. The opinions expressed here are valid only as of the date of the interview. Fund holdings and Dr. Mobius's analysis of these issuers and their economic environment may have changed since that date. Opinions are intended to provide insight into how he analyzes securities. They are not intended as individual investment advice. The most recently published portfolio holdings are available on the Fund Portfolio page.
Investing in developing or emerging markets involves special risks, including high volatility, currency fluctuations, market and political uncertainty. For more information on the Templeton Developing Markets Trust, contact your financial professional or download a prospectus, which contains important information about the fund's goal, sales charges and risk considerations. Please read it carefully before investing or sending money.
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