Templeton’s Mobius on 2012 Outlook: Market Volatility Here to Stay

With crises come opportunities, notes lead manager of Templeton Emerging Markets Small Cap Fund

Mark Mobius on cover of Feb. 2011's Investment Advisor. Mark Mobius on cover of Feb. 2011's Investment Advisor.

Market volatility will be a continued risk in 2012, and it’s difficult to say when the next crisis may hit, says Mark Mobius, Franklin Templeton’s emerging markets guru, in his outlook for the new year.

“We cannot exactly predict when the next market correction will hit us, nor know how great or small it will be, but we do realize that market volatility seems to be here to stay, with the increasing interconnectedness of markets and the occasional misuse of derivatives in the global financial system,” writes the lead manager of the Templeton Emerging Markets Small Cap Fund (TEMMX).

But on the plus side, notes the Ph.D. who has been with Franklin Templeton since 1987, investment opportunities can be found in large emerging economies such as China and India, which continue to increase their contribution to global GDP.

“We believe with every crisis comes great opportunity,” Mobius says. “Therefore, we continue to invest with a long-term horizon in companies that we believe are undervalued, fundamentally strong and growing, and those that we think can weather difficult times.”

The Templeton Emerging Markets Small Cap Fund is 49.3% invested in Asia as of Sept. 30, 32.6% invested in Europe, 9.22% in the Middle East and Africa, and 7.1% in Latin America and the Caribbean. The fund’s top five holdings are Universal Robina Corp., Anadolu Cam Sanayii AS, Trakya Cam Sanayii AS, Grupo Herdez SA and I.T. Ltd.

“We believe emerging stock markets could become much larger than they are today, and over the next decade, their combined value could exceed the combined value of the U.S., Japanese and European equity markets,” Mobius predicts.

The fund manager’s predictions appear alongside year-end commentaries from the 10 managers across the various fund families at Franklin Templeton.

Other highlights from their outlooks include:

The case for equities in 2012. Edward Jamieson, president and chief investment officer of the Franklin Equity Group, remains optimistic about continued slow growth in the United States along with more robust growth in emerging markets in 2012.

His optimism stems from job growth that was significantly higher than in 2010, real GDP growth that by year-end had been upwardly revised for three consecutive quarters, U.S. corporate profits that set records throughout the year and consumer confidence that reached a five-month high in November.

“For investors with an eye on the long term, we believe this is a good time to invest in the U.S. equity markets,” Jamieson writes. While investors should expect continued high correlation in the stock market because of macro risks, I also believe there is the opportunity for capital appreciation from earnings growth.”

Persistent eurozone instability and global economic woes. Higher long-term interest rates, a climbing U.S. Treasury yield and reasonably encouraging economic data in the United States helped soothe equity and credit markets during the first half of 2011, says Edward Perks, Franklin Equity Group’s director of core and hybrid portfolio management.

And yet continued concerns about the eurozone’s stability and political dysfunction in Washington that ultimately led to a downgrade of the U.S. credit rating resulted in an upturn in market volatility in 2011, Perks notes.

“Despite encouraging reports regarding fundamental drivers of economic growth, such as GDP, auto sales and retail sales, investor anxiety based on systemic issues continued to drive global financial markets through the end of the year, creating an investment environment we regarded as largely based on irrational and reactionary behavior,” he says.

How does his team of equity and credit analysts cope with the volatility? “We look for the most extreme differential between our expectations of the value of a given company and the value assigned to it by the market,” Perks writes. “To determine the value of potential investments, our core/hybrid strategy employs a holistic approach that looks at each company’s capital structure and how exposure to different parts of a firm could potentially benefit investors.

Within that core/hybrid strategy, Perks concludes, a commitment to finding dividend yield is key.

Natural resources opportunities. “We view these periods of increased market volatility as opportunities to purchase what we believe are high-quality companies in the natural resources and precious metals space whose shares have suffered from indiscriminate selling,” write Franklin Equity Group portfolio managers Frederick Fromm and Steven Land.

In fact, they say, “an opportunistic approach is a core part of our strategy and one that we believe can potentially enhance long-term investment results.”

For example, when benchmark crude oil prices dipped below $80 per barrel in September and raised the potential for a slowdown in 2012 drilling plans and rig activity, some industry followers and sell-side analysts quickly–and irrationally in Fromm and Land’s view–turned negative on oilfield services stocks.

The top five holdings of the Franklin Natural Resources Fund (FRNRX), lead managed by Fromm, are Chevron Corp., Schlumberger Ltd., Occidental Petroleum Corp., Anadarko Petroleum Corp. and Halliburton Co.

Read Fact Check: Did Mobius Say Financial ‘Armageddon’ Was Coming Soon? at AdvisorOne.com.

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