(The following press release from Mark Mobius, executive chairman,
Templeton Emerging Markets Group, was received by e-mail. It was not confirmed
by the sender.)
Q&A on the BRIC and African Economies
Mark Mobius, executive chairman, Templeton Emerging Markets Group
15 May 2013
Growth in BRIC economies has slowed down in 2012 and early 2013. They are now
facing major problems. How do you perceive the macroeconomic situation in each
country? What are their major risks?
It is a bit of an exaggeration to say that the BRIC countries are “facing major
problems”. The BRIC countries’ GDP growth rates have slowed, but apart from
Brazil, the other three economies are still growing much, much faster than most
developed countries. Investors are concerned that China’s growth rate has
slowed to 7.7%, but when was the last time the US, Japan, Germany or the UK
saw that pace of GDP growth? One should also keep in mind that as these
countries grow rapidly, the base gets bigger and it is therefore much harder to
maintain the double-digit growth rates seen previously. China is now a US$6
trillion economy, second only to the US. The fact that an economy that size
can grow at close to 8% is in itself an amazing feat.
On a country by country basis:
Brazil continues to show tremendous potential. It has a young and large
consumer population and vast mineral and farming resources. With rising income
levels, Brazil is likely to become an important market for consumer goods.
President Rousseff’s government is very focused on eradicating poverty and
expanding the middle class. Some of the changes have created short-term
problems for a few companies, but we think they will make the necessary
adjustments and eventually get it right. Inflation and low growth could be of
concern in the short term. There is also a need to remove some of the
bureaucracy and free up the economy. In our opinion, the complex tax code
clearly needs revision, and acceleration in the granting of concessions by the
government to improve infrastructure is also vital to support stronger growth
for the country. The quality of investment in education is another area that
could benefit from improvement.
The Russian economy is very dependent on the price of oil, and if oil prices
stay high, Russia’s economy is likely to continue to hum. Like China, it is
facing an aging population problem. However, the middle class should continue
to swell as wealth from commodity exports filter down into the economy.
Businesses supplying consumer goods and services to this burgeoning market
appear to have the potential to benefit. Russia’s financial structures are
underdeveloped and consumer debt levels are generally low. The Central Bank
left its benchmark interest rate unchanged at 8.25% thus far this year in view
of rising inflationary pressures. Russia suffers from an investor-confidence
issue, demonstrated by the persistent outflow of capital from this market. If
the government can instill good governance in corporate giants like Gazprom and
Rosneft, we think the situation could change quickly.
In our view, bureaucracy is the biggest problem in India, the world’s
second-most populous country, and Indians themselves often joke that the
country grows in spite of government policy, not because of it. One should note
that there is a huge disjoint between what the elected government wants to
achieve and what the bureaucrats are willing to do to help the government
achieve its goals. India’s Prime Minister and Finance Minister have been very
active in encouraging more foreign investment into the country, but when
investors try to bring capital into the country, they are often overwhelmed by
red tape. There have been significant improvements in corporate governance,
including the launch of an electronic voting system that could help raise the
voice of minority shareholders. However, we think there is more to be done in
terms of minority shareholder protection, especially from related-party
transactions. India has a vibrant stock market with thousands of listed
companies and a strong culture of entrepreneurship and investment.
Chinese equity markets have been volatile, as bouts of enthusiasm have often
been followed by fears of government tightening measures. The property market
has presented the Chinese government with a great challenge. It needs to
maintain prices at affordable levels but must also ensure that its price
control mechanisms do not cause a crash in property price. China’s economic
data has generally remained positive. As we said more than a year ago when
there were questions as to whether China was going to have a “soft or hard
landing”, we did not think that China was going to “land” at all but that it
would keep on growing at a robust pace. Exports have remained resilient while
domestic consumption is picking up rapidly as wages rise and disposable income
increases. The Chinese government has over US$3 trillion in reserves, and thus
its ability to stimulate the economy when needed cannot be questioned.
Outperformers in the past, the BRIC markets have been underperforming in recent
years. The BRIC asset class has also been recording outflows. Do you expect
these trends to continue?
No single market will outperform others on a consistent basis. If we look at
historical returns, the best performing market in one year is seldom the best
performing market the following year. Hence, it is important to be properly
diversified, investing across all markets. There have been some outflows from
BRICs as the so-called “hot money” goes in search of short-term gains, but
this is usually a good sign that a market has hit a bottom or is close to the
bottom. While we cannot predict what will happen to stock markets, we can
confidently say that (1) emerging economies, driven by the BRIC countries, have
been growing much faster than developed countries like the US and are likely
to continue to do so for many more years; and (2) most investors today are
chronically underweight emerging-market equities. While emerging markets now
represent about 35% of global market capitalization, most investors have less
than 8% invested in this area.
One of the themes discussed at the BRICs Summit was infrastructure in Africa.
What is the current involvement of the BRIC countries in Africa infrastructure
and how it will shape the markets there?
The BRIC nations have pulled together combinations of economic development and
investments to propel rapid economic growth to a cohort of new economies,
especially several in Africa, including Egypt and Nigeria, as well as others
such as Indonesia, Vietnam and Turkey. Opportunities continue to beckon
particularly as BRICs nations’ growth rate influences many frontier markets,
considered a subset of emerging markets.
Emerging economies in Africa could not only help offset any growth shortfall
that might occur as the BRICs mature, but by supplying resources and markets,
they may also help to insulate more established emerging economies from the
impact of sclerotic growth and slowing demand in developed countries. Newer
markets typically have more room to grow, and the search for growth potential
amid acute global volatility has been encouraging many investors to expand
their horizons. Africa is also well known for its wealth of natural resources,
much of it barely developed, which includes oil and gas, a variety of metals
and minerals, as well as huge tracts of agricultural land.
What is the role of China in Africa now? How did China and Africa’s economic
ties evolve from trade and project contracting to investment and finance, and
how will they advance further?
We believe that China plays a role in the development of African countries. For
example in Ghana, during our visit to the Central Bank, we met a very
competent group of executives eager to promote Ghana as an investment
destination. Their current focus was on containing inflation and creating a
stable business environment. Credit in recent years has been tight, but the
Chinese government has continued to provide loans. Since 2007, all university
and college institutions in Ghana provided Chinese language courses. This
initiative reflected China’s growing role as a superpower and Ghana’s close
ties with China. Chinese involvement in the country goes far back and has been
close since the 1960s, when President Kwame Nkrumah lobbied for China’s
reinstatement in the United Nations.
Another example is Kenya, which we think has an attractive position as a centre
for India’s and China’s investments and interests in Africa. We have seen many
companies setting up their operations in Nairobi, Kenya’s capital city. The
United Nations also has a large base there that it uses for its operations on
the rest of the continent.
Before arriving for the BRICs Summit in South Africa, Chinese President Xi
Jinping visited the United Republic of Tanzania and Congo Republic. What could
the visit bring to the table in term of boosting the local economy? What is the
role of South Africa in particular?
These countries could benefit from Chinese investments in Africa alongside
countries like Nigeria and Kenya. The Chinese have been very focused on
investing primarily in infrastructure in Africa – building roads, railway
tracks, power plants, and so on. Such investments provide the backbone for
economic activity and growth.
South Africa is the largest economy in Africa, and it is the only country on
the continent where we think the “frontier” market label doesn’t apply. South
Africa stands out among its African peers with a large, wide, deep and liquid
equity market. Moreover, a number of South African companies provide exposure
to markets further north that might be difficult to secure locally. South
Africa’s corporate governance is held in high esteem by many in the global
investment community, and it is also a country that has proven able to reinvent
itself politically and economically. We believe South Africa and its people
appear well positioned for greater long-term prosperity.
Could you name some frontier countries that have significant growth potential
and explain why?
Individual countries such as Nigeria and Kenya are projected to continue
growing faster than other economies globally. Growth on this scale has created
burgeoning middle-class populations and dynamic domestic economies that can
provide opportunities for consumer companies as well as a degree of insulation
from problems in developed markets.
Nigeria is the second-biggest sub-Saharan African country with plentiful
natural resources, but at present it is held back by a critical lack of
infrastructure, notably power. The country’s reformed banking system has
provided an attractive means to invest in a fast-growing domestic economy, in
our view, and we will look to invest in other areas as regulatory reform
Kenya, with a new constitution following serious political disturbances in
2007, is attractive to us both for its significant natural assets, notably in
agriculture, and as an entry point for much of the investment into the rest of
Africa. A well-regulated telecommunications market provides opportunities to
invest in mobile telephony, in our view, while investment opportunities in
retail and banking are also available.
Myanmar is also another country where we see opportunities. Firstly, our hopes
are high that Ms. Aung San Suu Kyi will nurture this historically troubled
nation into a new era of democracy and personal freedom. We had already
witnessed an improvement in Myanmar’s relations with the rest of the world,
signaled by a visit from US Secretary of State Hillary Clinton, an exchange of
ambassadors with the US, and collaboration with the International Monetary
Fund (IMF) on currency reforms. As we see it, for Myanmar to realize its full
potential, it must work to convince Western countries to ease or eliminate
sanctions, bring in foreign direct investment and develop its infrastructure.
We believe investment is essential to the reform process, and successful
reforms generally raise economic productivity, which in turn could help bring
more goods and services to the public.
Press spacebar to pause and continue. Press esc to stop.