How did you come to be acknowledged as the guru of the emerging market funds and frontier economies?
When I was in my early 20s, I began to see the world and spent some time living overseas. The first country I visited was Japan and, back then, it was considered an emerging market. The country was a real shocker to me. The dramatic differences in lifestyle, art, language, architecture, entertainment and business were so dissimilar from what I had experienced previously that I realised I was missing a great deal of what the world had to offer and I needed to learn more. That started me out on a quest to experience more of the world. I was fortunate to have been able to work directly with the legendary investor, the late Sir John Templeton. One key thing I learned from Sir John is that, if we search worldwide, we can find more and better bargains than by studying one nation.
So, I wouldn’t call myself a ‘guru’. The moniker was probably coined when I started investing in the emerging markets in the late 1980s; it was still considered a niche or ‘exotic’ investment then. Today, many investors are familiar with them, and I am seeing more and more investors turn to emerging markets as a way to diversify their portfolios. There is still so much more to learn about these markets as they are constantly evolving and adapting to the changes brought upon by technology, such as the Internet. Some markets are at the dawn of opening up to the world, while others have developed so fast and far that they should be categorised as a developed instead of emerging market. Yet, emerging markets themselves are not a homogeneous zone. Within the emerging markets universe, we believe frontier markets as a whole have begun to take an impressive lead in terms of growth.
Looking back, share with us about your strategy and roadmap in your first 100 days as the Executive Chairman of the Templeton Emerging Markets Group?
The first 100 days were very challenging. The first step was to establish an office in an emerging market country. Up to that time, Templeton had only three offices – the head office in Nassau, the Bahamas, and two offices in the United States, both of which in Florida (St Petersburg and Fort Lauderdale). So, the idea of establishing the first Templeton Emerging Markets office in Hong Kong, so far away from Nassau and Florida, was a challenge for the company. I succeeded in doing it and that became the basis for our expansion to all parts of the emerging markets world, with 18 offices in Asia, Africa, the Middle East, Eastern Europe and Latin America.
The next big objective was to create a database of emerging market companies. Most of them were not covered by the usual database suppliers and there were no brokers with emerging markets research departments. So, I set out to establish our Emerging Markets Database, including five years of historical financial data for all companies, five-year projections and all kinds of ratios to analyse that data.
In addition, I felt it was necessary to visit companies before we invested (in them) and that entailed a great deal of travel. The next challenge was to hire qualified emerging market analysts with the goal being that we find professionals with good backgrounds in the emerging markets. We now have 80 dedicated professionals in our team, who have an average of nine years with us; at least 10 of them have been with us for over 20 years! We are lucky to have been able to keep our staff happy and challenged so that they are not tempted to leave us. The first two employees, Allan Lam and Tom Wu, have been with us since 1987, when we started in Hong Kong. So, you can see that the strategy was to establish a knowledgeable and professional team with an excellent database – the foundations for a good asset management company.
What promise does Asia hold for the Templeton Emerging Markets Group?
The long-term investment case for emerging markets has not changed. Three key themes remain in place: their economic growth rates, in general, continue to be markedly faster than those of developed markets; most have much greater foreign reserves; and the debt-to-GDP ratios are, generally, much lower. We are excited by the prospects of the Asia ex-Japan region as a whole, noting that economic growth is high even in the context of emerging markets, while the demographic profile is positive.
Within Asia, China is tremendously influential and we remain convinced of the long-term importance of the decisions made at the Communist Party’s Third Plenum in 2013. The reform measures included deregulation, permission for foreign firms to enter service industries, land reform and remodelling of the hukou system of household registration that limits the rights of migrant workers. Other measures included the introduction of market discipline to resource pricing; reforms aimed at improving the efficiency of state-owned enterprises; fiscal reforms including the introduction of a property tax to place the financing of local government on a sounder footing; as well as the introduction of a bond market to allow local governments to raise finances from sources other than banks. Social security reform is potentially very significant for the fund management industry, while financial liberalisation could have far-reaching impact. We also believe the economic recovery in the developed markets is a positive factor for China’s market. Greater growth in those countries should help sustain China’s exports and support its overall economy. China represents one of the largest economies in the world, and it is a typical emerging market in that it still has a relatively low participation rate in capital markets. This provides good potential opportunities for value-oriented investors like us, as valuations are generally depressed by the lack of market confidence.
My travels recently took me to Malaysia. The country has been benefiting from favourable fundamentals such as a youthful demographic and an expanding middle class. Since we began investing in Malaysia in the late 1980s, we have seen a lot of changes take place. The country has opened up to more foreign investment, while the number of listed companies and market liquidity has grown significantly, providing investors with an expanded opportunity set. We think that, as the government continues to progress in reforms, Malaysia’s investment potential should expand.
In recent days, we have seen Malaysia embrace the reform efforts we think are needed to help achieve the ambitious goals the country has set, not only in attaining developed-nation status but also in working to become a regional hub in trade, education and manufacturing. Additionally, we believe the liquidity provided by the Bank of Japan and the People’s Bank of China should help support Malaysia and other regional markets as the US Federal Reserve has ended its long-standing quantitative easing programme and is considering raising rates.
As investors in Malaysia, we feel it is important to be selective. One area of focus is smaller companies that we think have potential for growth, but that have been generally overlooked by other investors. Utilities is one area we think could potentially benefit as subsidies are lifted, and we believe profitability may improve as a result. We also like consumer-oriented companies that can stand to potentially benefit as Malaysia works towards its long-term goal of becoming a high-income country, and as more of its people potentially rise into the ranks of the middle class.
What are your strategies and secrets in uncovering strong growth and profitable companies in frontier economies?
Frontier markets can be considered a subset of emerging markets and they are located around the globe, in Asia, the Middle East, Eastern Europe, Central and South America, and Africa. They are typically economies at the lower end of the development spectrum and are the generally smaller, less developed and less liquid emerging markets that are considered to be in the nascent stages of development. In essence, they represent what some emerging market countries such as Brazil, Russia, India and China were 20 to 25 years ago.
We believe frontier markets can be attractive opportunities for three reasons: growth potential, valuation and correlation. In terms of potential, we have seen growth in many of these markets. If you look at a list of the 10 fastest growing economies during the last decade, one is China, but the other nine are frontier markets. The second factor is valuations. We very much like what we consider to be the attractive valuations that we have found in many frontier markets during the past year. Lastly, correlation. If you look at the historical correlation of frontier markets with emerging markets and with developed markets, it’s actually very low. And also the historical correlation in between the different markets is very low. If you look at what is happening in Argentina, it appears to have no impact on what is happening in Nigeria or Vietnam. So, it is really an asset class where we think there is diversification potential.
Frontier markets tend to be more exposed to their domestic economies, many of which are developing rapidly as opposed to the global economy. Overall, we believe there have been a number of factors supporting frontier markets’ long-term potential. These include high levels of economic growth, positive local developments, such as reforms and relatively low levels of consumer and sovereign indebtedness, as well as what we consider attractive valuations. In addition, we believe undeveloped natural resources, low-cost labour, favourable demographic trends and potential technological catch-up could continue to support these markets.
Some have argued against investing in frontier markets because of their limited size and poor liquidity. We have not found these concerns to be justified in all cases. An overall market capitalisation for frontier markets in the region of USD1.8trillion and daily turnover of USD3.6billion appear to us to be a very adequate opportunity. Considerable numbers of individual stocks sit within frontier markets, yet some have capitalisations and trading volumes that would place them comfortably on par with some emerging market peers. Some banks in Pakistan and Nigeria, a telecommunications company in Argentina, and an oil and gas company in Central Asia come to mind.
I generally spend about a third of my time in these markets, with Dubai, Eastern Europe and South Africa serving as hubs for access. The time I spent there allows me to understand the market a lot more. The biggest misconception is the idea that emerging or frontier markets are more risky than other markets. Also, the idea that they are slower growing, have less foreign reserves and have high debts. These are all misconceptions and, therein, lie hidden opportunities waiting to be uncovered.
For instance, there is often this idea that ‘Africa is Africa’, as if every country there is the same. Most people do not realise how diverse the landscape, economies and people are. A common misconception is that Africa is plagued by social ills. We do not deny violence, political unrest and poverty exist in areas of Africa, and we have to be cognisant of these serious issues. But that is not the whole story. There is also natural beauty, cultural diversity and business progress taking place. I have often been asked whether I have felt unsafe travelling in underdeveloped countries, but I have been fortunate enough to say my most frightening experience in Africa has been getting stuck in an elevator!
How do you read the industry sectors in the frontier economies that you are bullish about over the next five years?
Frontier markets have been of particular interest to us in recent years, as we perceive many of them as having good economic growth potential. Government reform efforts also present the potential for both earnings growth and revaluation for frontier market companies. There is good potential for them to forge ahead in their development this year and beyond.
We believe technology is a major factor driving frontier market growth, in particular the explosive growth in smartphone ownership. By connecting individuals and communities to Internet-based marketplaces, smartphones can have an impact on economic growth well beyond their direct input. In effect, emerging and frontier markets are leapfrogging old technology and taking advantage of the latest developments today. One example is the phenomenon of Kenya’s mobile money transfer system, large in scale and with growing potential. A mobile network operator launched the service to meet the needs of the large number of Kenyans without bank accounts, offering them a secure means of remitting funds to their families. Unexpectedly, the service grew like wildfire and, as of March 2012, transactions sent through the M-PESA (the Swahili word for money), represented about 25 per cent of Kenya’s GDP. As a result of that success, the system has spread rapidly to many other countries in Africa, Asia and even Europe, where geography or the security situation render money transfers over long distances problematic.
What are the talents you look for in assembling an ‘A Team’ for the Templeton Emerging Markets Group?
Engendering a great Templeton Emerging Markets team with diverse talents and backgrounds is my greatest personal achievements. The way I see it, this success is a team effort and, to play on my team, I look for curiosity and the desire to learn, determination, gentility and humility. The late Sir John Templeton, someone I deeply admire, had all these qualities.
What do you do to stay on top of your game?
Exercise, eat well, study, travel and observe. These are fuels for not only my body but also my mind so I can remain sharp and fit to travel. I try to make sure that each hotel I stay in has a health club or is near one. When I get up in the morning, I do aerobics on a bicycle or trainer. In the evening, I try to do weight training. Usually a half hour in the morning and an hour in the evening are best. I can fit it in with no problem and it is a great way to relax.
Which movie, in your opinion, best serves as an important lesson for a CEO?
All the movies I have seen contribute something to my knowledge and experience, which I can relate to my work. Very often, at the end of a movie, while the credits are being shown, most of the audience quickly files out but I stay in my seat to read all the credits because you learn something, like the movie was financed by some Hungarian film fund or was a joint venture with a Chinese film studio. The hundreds of names of technicians who contributed to the film’s production are also interesting. So, if you see a lot of Indian names, you realise that, perhaps, the film’s special effects were done in India. I am a classic film fan and one that I watched recently again was Laura, where the daydreams and intuitions of a detective help solve a murder case, an example of how lateral thinking and the subconscious can solve problems.
What keeps you awake at night?
Being in the investment industry means being prepared for a world that is full of unexpected events, which no one can predict. I try not to let that keep me awake at night, where possible. To do that, I have a great team that actively manage our clients’ investment portfolios, and stay ahead and abreast of events that are happening in their local markets.
To ensure safety, we tend to be diversified so that, in the event of a particular negative event in one class of investments, country, sector or company, we protect the portfolios by being diversified. Thinking long-term is also another key factor as thorough research enables us to see the merit in a particular stock, especially during market volatility, and go in when value emerges. Focusing on these fundamentals give us the clarity of mind and conviction to weather downturns, short-term market noise and hold for potential recovery. That said, being contrarian or value-driven does not mean we will necessarily buy anything we can get our hands on during a market downturn. When buying stocks during a bust period, it is important that we do not buy corpses, which have fallen in price but have unhealthy fundamentals, but, rather, find patients with good recovery prospects that appear undervalued.
