The growth story in emerging markets has not come to an end despite five years of relative underperformance, according to Dr. Mark Mobius, manager of the Franklin Templeton Emerging Markets trust.
Over the last decade, the MSCI Emerging Markets index has returned 298.75 per cent compared with 133.93 per cent and 100.92 per cent respectively from the FTSE All Share and S&P 500.
However, the majority of that outperformance came in the earlier part of the decade, and the emerging markets index is up just 4.54 per cent over the last three years, roughly 40 percentage points behind its developed market counterparts.
Star emerging markets manager Mobius says better economic fundamentals should see the sector return to a high-growth trajectory.
"I assure you growth is not over for emerging markets for three very simple reasons," he commented.
To begin with, he says GDP is expected to grow by 5 per cent in real terms in emerging markets, despite the slowdown in areas such as China.
He adds that the elevation of frontier markets into the emerging sector is offering new growth opportunities from fast-growing countries, particularly in the small cap space.
The UAE and Qatar have both been upgraded to emerging market status by the MSCI this week.
The second reason is the strength of foreign exchange reserves in emerging markets, giving their governments the ability to control their own exchange rates and maintain fixed rates when they want to.
The third reason to be optimistic is the markets’ relative lack of debt compared with their counterparts in the West.
Mobius' optimistic stance is in contrast to rival Angus Tulloch, who heads up the First State Asia Pacific Leaders fund. He told FE Trustnet earlier this year that the golden age for emerging markets was over.
Mobius admits there has been a pullback from emerging market debt back into the US, and says this is because investors are looking to profit from the recovery in the world’s leading economy.
However, he added: "That’s not sustainable. People will return to emerging market debt."
Mobius remains particularly bullish on Thailand, in spite of its strong outperformance in recent years – the country makes up nearly a third of the $18bn Templeton Asian Growth fund.
"The weighting is a result of price increases, not as a result of buying more in Thailand," he said.
"We’ve actually been taking a bit off the table in Thailand but we do feel the country will continue on this path of growth. There’s quite a revolution going on in Thailand – an economic revolution. There’s more and more money going into more and more hands."
Mobius’s co-manager on the Templeton Asian Growth fund, Allan Lam, says Thailand is an especially attractive play for income investors.
"Thai stocks have a common feature of very attractive yields," he said. "You can find dividend yields between 3 and 5 per cent."
Thailand-focused funds have done particularly well over the past three years. Three of the top-five offshore funds regulated by the FCA are single-country Thai funds: Allianz Thailand Equity, JP Morgan Thailand and Amundi Equity Thailand.
The FF Thailand fund was the sixth best-performer over the period.
Mobius says that there are even reasons to be positive about Russia, a market that often provokes concerns among UK investors.
Although the country is still dealing with severe corporate governance problems, Mobius says it is moving in the right direction.
"Russia is a very cheap market, probably the cheapest market in the world," he said.
"The big issue is corporate governance, but they are moving to more privatised businesses. It will take time but that is the direction they’re going in. I think we can expect more positive news from Russia."
The manager recently attended an annual conference at Russian bank Sberbank – a major holding in many emerging market portfolios – and said the message was loud and clear: Russian companies need to improve corporate governance to attract investment.
All in all, Mobius runs a total of 17 portfolios, on 11 of which he is listed as the co-manager.
His flagship portfolio, the £2.2bn Templeton Emerging Markets IT, has outperformed the MSCI Emerging Markets index over one, three, five and 10 years.
Over the last decade, it has gained 444.18 per cent, beating the index by more than 100 percentage points.
Performance of trust vs index over 10yrs
Among the trust’s top holdings are Thai bank Kasikornbank, Asian retail firm Dairy Farm International and Brazilian banking firm Banco Bradesco.
Its two highest sector weightings are to financials and basic materials, at roughly 32 per cent each.
The trust is currently trading on a discount of 10.5 per cent, slightly wider than its one- and three-year averages.
It has no gearing. It is yielding 1.1 per cent and has ongoing charges of 1.31 per cent, according to the AIC.
Mobius also runs the open-ended Templeton Frontier Markets, Templeton Latin America and Templeton Asian Growth portfolios.
The soft-closed Frontier Markets fund has consistently been a top-quartile performer in the FCA Regulated Equity – Emerging Markets sector, though the UK version of the fund has performed broadly in line with the MSCI Frontier Markets index.
Over the last year, the fund has gained 28.4 per cent while the index has picked up 30.49 per cent.
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