Why Mark Mobius thinks US stocks haven’t fallen — and where he sees emerging market opportunities

US markets have provided plenty of excitement this year to keep investors on their toes. But as much as US and European stocks have outperformed since the beginning of 2022, emerging market stocks have outperformed.

But as the US dollar has retreated from its multi-decade highs over the past month, investors including Allianz’s Mohamed El-Erian have pointed out that valuations in emerging markets have reached “historically cheap” Level.

Asked about his outlook for emerging markets, Mark Mobius, a leading investor who helped build Franklin Templeton’s emerging markets business before launching Mobius Capital Partners, argued that this year’s overall tone While “generally negative”, there are still plenty of opportunities to be explored in the emerging markets sector.

‘We are getting good companies in all sectors’

Certainly, the poor performance of EM stocks is nothing new.

MSCI Emerging-Market Index 891800,
A gauge that includes stocks of more than 20 of the world’s largest markets in Asia, Latin America and Africa is down 18.4% compared to the S&P 500’s 13.4% SPX,
year to date. Over the past 10 years, MSCI’s EM index has returned just 36.9% in US dollar terms, while the S&P 500 has returned 264.5%, according to FactSet data.

Within the index, performance varies widely, and past performance does not determine future returns. Asked about his vision for each sector, Möbius said it would be “impossible to generalize”, but he sees “opportunities” for investment around the world.

See: According to these analysts, why is the US stock rally beginning to look like a new bull market?

“We are getting good companies across all sectors,” Mobius said during an email exchange with MarketWatch.

When it comes to individual countries, Mobius said he supports India among the largest EM players, and sees opportunities in smaller emerging and marginal markets in Kenya and South Africa.

Any investor looking to invest in the EM sector should keep some important pre-requisites in mind.

“The key is our ability to obtain and repay the country’s debt and the foreign exchange position” [U.S. dollars] We want to liquidate the holdings when out of the country,” Moebius said.

At the company level, Mobius looks for firms with strong pricing power and “little or no debt”.

Since the start of the year, the financial crisis in Sri Lanka has given rise to fears that other frontier markets may experience the same thing as a stronger dollar and higher commodity prices weigh on the finances of countries that are largely Import goods like oil.

See: RBC says stock-market rally ‘fragile’ after investors expect earnings ‘Band-Aid will burst’

While there are exceptions – the currencies of energy producers Mexico USDMXN,
and Brazil USDBRL,
Has held up remarkably well – the Indian Rupee has risen over 6% against both the USDINR dollar,
and Chinese Yuan USDCNY,

Investing in emerging-market equities means investing in Asia, which is by far the largest share of publicly traded companies represented on the MSCI index.

Taiwan Semiconductor Manufacturing Co. 2330,
The semiconductor giant, a key link in the global technology supply chain, has the largest weighting of any company on that index.

Outside Asia, Brazil has the largest weighting, with Brazilian companies comprising over 5% of the index’s market capitalization. One reason for this unilateral representation is that Latin American economies have more of a “fixed income culture”, which makes them more heavily represented in emerging-market bond indexes, and less in equity gauges, according to Dirk Willer, managing director. Is. Emerging Market Strategy at Citigroup.

Chinese stocks have performed particularly poorly over the past year, as investors have shunned the country’s high-tech stocks amid Communist Party crackdowns on the industry.

CranShares CSI China Internet ETF KWEB,
It is down more than 23% so far this year as investors fear that China’s property market could metastasize into a wider financial crisis.

While he expects Chinese tech stocks to bounce back soon, Mobius said foreign investors should approach Chinese stocks with caution.

“There will be some improvement in those technical names but the general tone of the market is not good given the disastrous property market,” Mobius said.

With House Speaker Nancy Pelosi’s recently completed visit to Taiwan making headlines this week, does Moebius worry that it could put additional strain on bilateral ties?

“influence [of Pelosi’s visit to Taiwan] Tensions between the US and China will continue to increase on all fronts like trade, investment, education etc. Competition is increasing across all sectors, with technology and weapons most prominent, Mobius said.

US stocks haven’t looked down yet

Moving to the discussion of US stocks, Mobius said he still thinks there will be more pain ahead for investors, even though stocks bounced back in July.

“We probably have another leg down as the Fed continues to raise rates,” he wrote. “I expect rates to go up a lot and that means many companies will be in trouble and glamorous tech stocks without earnings and relying on more and more cash inputs will be in trouble.”

Möbius said he wouldn’t feel comfortable calling from below until he saw “absolute surrender.”

“Of course we should realize that we are already in a bear market, but the endgame requires complete dedication on the part of investors. At the moment, there is a lot of hope.”

US stocks rose on Wednesday after back-to-back losses. Dow Jones Industrial Average DJIA,
was on track to recoup its 400 point loss from the day before, while the S&P 500 and Nasdaq Composite comp,
Both were on track for strong gains.

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