Mobius Picks Best Emerging Markets, as G7 Growth Slows

Franklin Templeton Chairman sees Asia, South America as good opportunities

Mark Mobius on the cover of February's Investment Advisor. Mark Mobius on the cover of February's Investment Advisor.

The Organization for Economic Cooperation and Development (OECD) issued a negative economic outlook for the major industrialized economies, but noted that growth in emerging economies remains strong. Separately, emerging markets guru Mark Mobius told investors where specifically they could grab on to that growth.

Chief economist Pier Carlo Padoan likely surprised no one with the OECD’s assessment that “growth is turning out to be much slower than we thought three months ago, and the risk of hitting patches of negative growth going forward has gone up.” The Paris-based forum of democratic, market economies says that economic growth among G7 economies excluding Japan should remain at less than 1% in the second half of the year. On the bright side, “inflation may have peaked in emerging markets,” where the OECD suggests monetary authorities might usefully lower interest rates.

Meanwhile, Franklin-Templeton Chairman Mark Mobius, in an interview on Yahoo Finance’s Breakout, explained why the disparate growth trajectories of world economies matter. “There is a direct relationship between economic growth and the profitability of companies. The economic growth will be reflected in earnings of companies and then in turn reflected in the price of stocks.”

Mobius specified the countries he views as having the most favorable prospects currently. In Asia, he favors Thailand and Indonesia, two countries seeing expanded consumer markets. “The money that was concentrated in Bangkok and concentrated among the elite of that society is now being spread into the countryside,” he said. He added that authorities in Indonesia “are working very hard to wipe out the corruption throughout the countryside. That of course puts a lot more power into the hands of the lower-income population.”

In Europe, Mobius sees opportunity in Poland, Romania, Russia and Turkey. In contrast to the stagnation in Western Europe, Mobius says that Romania and Russia are accelerating reforms that should pay off over the next two to four years. In Latin America, Colombia and Chile are the most interesting countries today. Mobius is heavily in Brazil, which he says “has everything going for it” except for an overly valued real right now.

While he views the two emerging market powerhouses, China and India, as overvalued right now, Mobius remains heavily invested and expects good five-year results, explaining the emerging markets value proposition with simple math. These economies are growing at 7% to 9% annual growth rates while their populations are increasing at 1% annually. This means their per capita growth is increasingly rapidly.

The OECD, in its most recent forecast, expects 9.2% annual growth for China and 8.6% growth for India in 2012, both slightly up from their 2011 growth rates.

While the OECD believes inflation may have peaked in emerging markets, Mobius believes peak inflation is within view but not yet achieved in the world’s largest emerging market. A key policy tool besides interest rates is … pork. Writing on his blog Wednesday, Mobius explains:

“We believe that inflation in China could reach a peak in the near future as a result of the Chinese government’s decision in July to increase pork supply by releasing a portion of their strategic pork reserves. By releasing more pork supply into the market, the government hopes to combat rising pork prices. That move, combined with an easing growth rate, could subsequently lead to the end of the central bank’s current tightening monetary policy cycle in the near term.”

In agreement with the OECD, Mobius adds: “Other emerging markets such as South Korea and Turkey have either stopped raising interest rates or even cut rates as a result of the global turmoil despite inflationary pressures. We may see this trend in China going forward.”

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