For the past 30 years, Mark Mobius has served as a missionary on behalf of the places most people send missionaries to—emerging economies. The renowned Franklin Templeton Investments value manager has jetted from one far-flung corner of the world to the next, navigating military coups, Siberian snowstorms, and corrupt executives hurling threats, to unearth bargains as some of the world’s poorest countries transformed into economic powerhouses.
Mobius, who retired at the end of January as executive chairman of Templeton Emerging Markets Group, made a name for himself with on-the-ground research. The global nomad, who has spent much of his career living out of hotel rooms, has been prolific in documenting his adventures, often biking into the countryside or hitting the streets to gain insight. The research has attracted fans—there’s a manga-style comic book about him—and led to some prescient moves, like snapping up pummeled stocks during the Asian financial crisis that devastated emerging markets in the late 1990s, correctly calling the 2009 bull market, and investing in Africa earlier than others.
Born in New York to a Puerto Rican mother and German father, Mobius, now 81, studied fine arts at Boston University, eventually studying psychology and then getting a doctorate in economic development at the Massachusetts Institute of Technology. In between, he won a scholarship to study in Japan—a country he had to consult a map to find. Before becoming an investor, Mobius worked at a talent agency, taught communications, marketed Snoopy toys in Asia, and started his own industrial research firm. When legendary value investor John Templeton asked Mobius in 1987 to run one of the world’s first emerging markets fund, the closed-end Templeton Emerging Markets (ticker: EMF), he took on the task to invest $100 million in what then were just six markets. Since then, Templeton’s emerging markets strategy has grown to $30 billion, invested in 70 markets.
We talked with Mobius by phone on his second to last day on the job as he sat in his empty office in Singapore, after giving away to colleagues 140 mementos collected during his travels. Mobius offered Barron’s some parting lessons, explained what bitcoin has to do with a possible market melt-up, and the best ways to capitalize on emerging markets as they move higher—as he expects them to.
Barron’s: To say emerging markets have changed since you began investing in 1987 is an understatement. What has been the most important transformation?
Mark Mobius: When I started, many markets were closed to foreign investors. The Soviet Union was behind the Iron Curtain, China was really Communist, most countries in Latin America were under military dictatorships or just emerging from them, and Africa was recovering from colonialism. The most critical change isn’t recognized: It is the incredible success of multilateral institutions in persuading these countries to adopt a market-based economy. When I studied economic development, we were trying to figure out why these countries didn’t grow. The conclusion: Foreign aid didn’t work in these countries because they weren’t adopting market-oriented policies and allocating resources according to demand. That has been one of the amazing changes. Countries have also become more standardized in their economic policies. When I started, Brazil was running 2,000% inflation, the government was printing money like it was going out of style, and the politics were messy. There are still scandals and corruption, but countries have become more sophisticated in the way they handle the currency and economy.
Part of the allure of emerging markets has been the strong returns from those very transformations, but now that many of these markets have emerged, should investors lower expectations?
No, because the change is not complete. Take Romania. It is still struggling with Communist mentalities. We run a big fund there, and state-owned enterprises have a lot of resistance to change. For example, there is a hydroelectric company that is losing money. The reason? Powerful people will buy up the electricity and not sell it to the distributors. There is a lot of this still going on. African countries are just embarking on the rule of law and a market-based economy. I’m very optimistic about what is happening [in the emerging markets] and the opportunity it holds.
What is a mistake you made that others can learn from?
I was too rigid at times. We would focus too much on metrics like price/earnings and price/book ratios, and didn’t pay enough attention to the total picture. We didn’t have the imagination of what could happen over five or 10 years and missed a lot of technology stocks during the boom. The spread of the internet—and knowledge—is another revolutionary change in the market. More than one billion smartphones will be sold this year, 70% of those in emerging countries like China and India. That’s an incredible development, not just from an economic standpoint, but also because people can learn what is going on and demonstrate against governments they don’t like.
Lately, investors are rushing into emerging markets, which returned 37% last year. Are we nearing a top?
Another 20% rise is not impossible.
Could rising interest rates derail the rally?
People think rising rates will be bad for the market, but between 2003 and 2007, rates rose and emerging markets also rose. The correlation between rates and emerging markets doesn’t hold water. But there is something else happening: Cryptocurrencies are creating another wave of liquidity, even though the Federal Reserve and other central banks are tightening and reducing liquidity. There are many naysayers that say the price/earnings ratio for the market is too high or the cycle has lasted too long, but that may not mean anything if there is still cash to spend around the world.
You mean bitcoin?
Yes. Whenever people ask me about bitcoin, I say I don’t talk about religion in public. A lot of it is based on faith, but there is a whole generation that accepts this, has grown up on the internet, and is constantly looking at smartphones. They believe this is real, though we old-timers think it’s a Ponzi scheme. You have to pay attention to it because the market is making money. One of my Chinese colleagues had $2 million worth of Korean won in a hotel room in Seoul he had made trading in cryptocurrencies that he needed to transfer to Hong Kong. Such trades are happening around the world. Bitcoin is an unknown factor for the market.
If markets are headed higher, what should investors own?
Commodities. People don’t realize that the demand for commodities is not going away. Look at imports of iron ore and oil by China. If you look just at the value, you will see it has gone down, but the quantity has gone up. The demand is still there. When commodity prices fell, mines canceled production plans and are now behind the eight ball. Supply/demand is out of kilter. The move in many of these commodities is just beginning.
Where do you see oil prices going?
$100 oil in the next year is not crazy, based not just on supply and demand but also on the dollar, which is weaker. If you see a weaker dollar, commodity prices will rise. For some emerging markets, that could be bad; for others, it would be good.
Brazil is one beneficiary of higher commodity prices, but it has been struggling to recover from a deep recession and political scandals. What is your read?
We are seeing a completely new mentality in terms of what people expect of government, in part because of the internet and the ability to get information and see the corruption. In the recent trial of [former President Luiz Inácio] Lula da Silva, the appeals court ruled against him [upholding his conviction on corruption charges], which was not expected. This is really revolutionary. Whether it sticks is the big question. But we are seeing this around the world: A whole generation that is better informed and capable of action—and willing to do it together.
That has also sparked a wave of populism. How does the backlash to globalization affect emerging markets?
It is not necessarily a rejection of trade, but what people feel is unfair trade and a move away from the multilateral model where everyone has to follow the same rules and some get a bad deal. We will see more unilateral trade agreements, but not a decline in world trade—too many are benefiting from the growth in trade.
China is part of that trade discussion, but it is the country’s debt that has loomed over the market. Does China’s debt evolve into a crisis at some point?
I tell people not to think about China the way they think about the U.S. or Europe. The big banks are controlled by the government, as are the major companies. Individual companies or isolated areas could see a crisis, but we are not going to see an endemic crisis like we saw in the U.S. because the Communist Party is running the economy. They are opening up their economy, but in no way have they abrogated control of the basic elements of the economy, like the currency or credit.
While others are focused on Alibaba Group Holding [BABA] and Tencent Holdings [700.Hong Kong], you are more interested in the changes at state-owned companies in China, like China Petroleum & Chemical [386.Hong Kong] and China Construction Bank [939.HongKong]. Why?
President Xi Jinping has said he wants to clean up corruption and has implemented corporate governance because it will generate better profits for shareholders, including the government itself. That’s a giant step. It’s a win-win: You have the government behind you pushing the reform, and it’s very unlikely the companies will go bankrupt because they are state-owned. It is not as exciting as a fast-growing internet company, but those companies, while still attractive, are reaching unsustainable levels of growth.
What other parts of the market are being ignored?
Beyond commodities—which have been not just ignored but also hated—there are good opportunities in small to medium-size companies that are not in the MSCI Emerging Markets Index. The winning game with the rise of exchange-traded funds was to go into big-cap stocks. But if you look out over the longer term, small to midsize companies are attractive. The trick is to identify those before they go into the index. I look for companies that have gone unnoticed but have adopted technology well, like chip maker Taiwan Semiconductor Manufacturing [TSM]. TSM has become a giant in the field by spending a lot of money on research and development.
You have often ventured into frontier markets, more recently Vietnam. What’s the best way to invest there?
In many of these smaller countries, private equity has offered some of our best results because you can go after smaller companies and bring them to market. The advantage of private equity is also the ability to go in depth with the people, deal with them face to face, and demand information you can’t always get as a public shareholder.
How has the job of an emerging markets investor changed now that information is much easier to get?
In 1987, there was no internet, cellphone, or often even a fax. Can you imagine how you found out what was going on in Argentina without visiting? Now, the problem is differentiating between what’s true and reliable, and what’s not. In that sense, on-the-ground research is clearly important, particularly with the advent of the exchange-traded funds.
Haven’t ETFs taken away the advantage of on-the-ground research?
I was very alarmed about how we were going to compete with a fund charging eight basis points, but then I began to see it as a blessing in disguise. ETFs are dumb investing, just buying the index. Clients are saying if we pay you X, you have to come up with something different than the index. To do that, you have to get on the ground and discover what doesn’t appear on Twitter or on websites. That will really differentiate active and passive funds—and that will be good for the investor in the long run.
Where do you look for signs of trouble?
The biggest hits to our performance have been related to corporate governance, such as with an Indonesian company where management was stealing. Auditors report what they are told and can themselves be corrupt. We have one person dedicated to paying more attention to the people behind a company. We look for signs like management’s unwillingness to explain items, particularly related to depreciation and valuation of assets, or owners or management deeply involved in politics that could put the business in jeopardy if there is a change in government. We also avoid companies where the cost of debt exceeds the company’s profit margins.
What’s the biggest risk to emerging markets?
A geopolitical accident in North Korea, Saudi Arabia, or Iran. Take Saudi Arabia. You could go there and say the princes are in control—it’s OK. But underlying that is a society that feels very differently. Because of the internet and the unhappiness in segments of the population, that can lead to a big upset. We are seeing this in the tension between Saudi Arabia and Qatar. These are examples of the strife that can lead to a big blowup in the market.
You’ve gone through countless uprisings and geopolitical conflicts. What lessons have you learned?
Sometimes you have a warning—you’d better listen. When Hugo Chávez came into power in Venezuela, he stated what he was going to do: Take over enterprises. We immediately sold all our assets—later on they were selling for half or less. You also have to sense the mood. In Argentina, [President Cristina Fernández de] Kirschner tried to kill the press and dismantle a big broadcasting conglomerate. In talking to management and looking at the situation, I thought they would survive because there was enough popular support for the broadcaster and against the Kirschner move. Sometimes, you have to take a calculated risk.
So a good gut instinct is key?
Well, I’ve been kicked in the gut so many times! It’s about the experience, but the most important thing is to stay optimistic. You can’t become negative about the terrible things you have gone through and the losses you have suffered.
What were some of the most important lessons you learned from John Templeton?
People who think they know all the answers probably don’t even know the questions. That was very astute. He also said the four most dangerous words were, “This time is different.” But the one that really has stuck with me is to buy when others are despondently selling and sell when others are greedily buying. That’s what it’s all about, but it’s the most difficult thing to do.
What does someone who has travelled around the world for decades do when they retire?
I love travel and will continue to do so. I’m leaving for Australia in two days and will be spending a lot of time in Hong Kong but also in Singapore, Thailand, and London, and I have two books to write, one on communication and the other on environmental, social, and governance [criteria]. I want to explore the evidence regarding ESG performance.
Despite your evangelism, U.S. investors still don’t hold much in emerging markets. What do you say to skeptics?
Look, more than half of the world’s population is in emerging markets; it accounts for almost half of the world’s gross domestic product, and these markets are growing at double the rate of the U.S. It’s crazy for investors to not be paying attention. Of course, don’t put all your eggs in, but at least half should be in emerging markets. I have about a third of my own wealth in emerging market equities; another third in property, mostly in emerging markets; and a third in cash. One reason I’m looking forward to retiring: I’m no longer restricted in what I can own, like individual stocks, so now I will work on getting some of that cash invested.
Good luck! Thanks, Mark.
Comments? E-mail us at firstname.lastname@example.org