Mark Mobius, arguably the most respected emerging markets investor and one of the great investors period, answered five questions for Institutional Investor magazine:
1 What did the financial crisis teach us about emerging markets?
Everybody was affected, including emerging markets equities. But what we learned is that emerging markets are much more resilient — they recovered much faster than developed countries. Another thing is that emerging markets have garnered more exchange reserves than Western countries. In the past, emerging markets were always short. Now China has $2.3 trillion and Russia has more than $395 billion in reserves. They certainly do not have to ask for aid.
2 What’s the near-term economic outlook?
This year we expect emerging markets to grow, on average, four times more than developed countries, or 4 to 5 percent versus 1 percent. India and China will be growing at 7 to 9 percent.
3 So are big investors shifting more money from the U.S. and Europe to emerging markets?
Institutional investors are by and large very underweight emerging markets. The average American pension fund has 2 to 8 percent in emerging markets, but all emerging markets stocks globally represent 20 percent of the world’s GDP. During the crisis everybody retreated to what they thought was safe: U.S. dollars. Then you had this rapid buildup, and a lot of these institutions were kicking themselves for not staying in. Now they are thinking, Am I getting in at the top? They have to start building a program that gets them into emerging markets at a much higher weighting. To be underweight emerging markets right now is crazy.
4 How much should investors allocate to emerging markets?
Well over 15 percent. When you travel to these markets you can feel it — the vibrancy and growth. Yes, there are challenges, but then you look at developed markets like Greece. That’s what I call a submerging market.
5 What are the hottest emerging markets now?
Brazil is at the top, then Russia, China and India. But besides the BRICs: Turkey, Poland and Thailand.
An easy way for an individual investor to invest in emerging markets is to buy into an Emerging Markets Stock Index Fund, which is what I have done.
A better way to get a meaty slice of emerging market equities would be to buy thro a SIP (systematic investment plan). This way you get a better averaging benefit because emerging market equities are also occasionally influenced by adverse EU newsflows, though their market fundamentals are far more resilient. Roughly 15% of emerging market businesses (barring China and Russia) have exposure to U.S and European markets and so it will merely be a price action that does not erode their intrinsic value and not erosion of fundamentals (say, earnings growth).
I’d recommend an emerging market ETF such as VWO to reduce expenses. Any reason for not doing this?
Index fund has almost no expense as well.
I used to have great love for etfs, and transaction costs for iShares are lower in Mexico than index funds.
But they were among the hardest hit in may 6th flash crash, as you prob. already know, Mo. They’re not that straightforward, as it turns out.
Biggest problem in my book now is that there hasn’t been a firm answer as to why. Stop/ loss orders, etc, but even alphaville only has theories ( http://ftalphaville.ft.com/blog/2010/05/10/225051/etfs-and-the-flash-crash/). And I talked to a bunch of analysts about this (I wrote a piece on it).
I still have BRIC and Mexican ETFs, and plan to hold on to them, but I’m certainly looking at them a bit more askance!