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Mobius on Emerging Markets: to Educate Global Investors About Closed-End Funds

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Mobius on Emerging Markets: to Educate Global Investors About Closed-End Funds Vol. IX, No. 1 A Global View of the Closed-End Fund Industry January 2009 THE SCOTT LETTER is intended Mobius on Emerging Markets: to educate global investors about closed-end funds. Closed-end Emerging Markets Expected to Grow Faster than the funds can be a valuable and profitable investment tool. To Developed Markets learn about closed-end funds, visit our web site, Once U.S. Recovers, Global Growth Will Continue www.CEFAdvisors.com, and in particular, read our article, What e interviewed Dr. Mobius by telephone economies in Asia are becoming more Are Closed-End Funds. Feel free Win Australia on December 30, 2008: domestically driven. Indeed, the services to forward this newsletter to SL: Good morning, Mark! What are you sector is gaining importance, especially in anyone who you believe could doing in Australia? China and India. Combined with govern- benefit from information on closed-end funds or Mobius: Well, it’s New Year’s eve and I ment expenditure in areas such as infra- global portfolios. am just relaxing, catching up on my reading structure as well as private and domestic here in Queensland. It’s beautiful here. consumption, this means the emerging – George Cole Scott Editor-in-Chief SL: That’s a beautiful climate this time of economies should be able to offset, at least year. Sounds like you are still in good health at partially, any decline in growth resulting 72, despite this difficult year. You still have no from slowing exports with an increased plans to retire, right? economic independence. The accumula- Mobius: That’s right. tion of foreign exchange also puts emerg- SL: I understand that you have just come ing economies in a much stronger position in from running. That’s good. I try to exercise to weather external shocks with reserves. every day as well. That keeps us going, For example, in China, those reserves total doesn’t it? I love my work and plan to more than $1,900 billion USD. continue working for a long time. Why quit? 4. Most importantly, for value investors, the Mobius: I have no plan to retire. current valuations of emerging markets SL: You wrote the following piece for The remain attractive. The benchmark MSCI Financial Times in November 2008. You said (Emerging Markets Index) is trading at a that emerging market investors should be posi- price/earnings multiple of 10.7, down from tive for the long-term: 18.5 a year earlier. This is even cheaper 1. While global growth has slowed, emerging than developed markets such as the U.S. markets are still expected to grow at a which is trading at a P/E of 16.5. Markets much faster rate than developed markets. such as Turkey and Russia are down to Predicted growth for emerging markets is single-digit P/E’s, making them especially an average of 5%, compared to the appealing. Of course, the [market] bottom expected 1% in developed markets. would be impossible to predict. However, 2. In the past, the U.S. was the largest taking a long-term view, these valuations importer of goods from Asia and other are attractive. emerging economies, but trade in emerg- We appreciate your usual clear and relevant ing market countries is now much more insights here. Now, what countries have you diversified with many exporting to new visited in the last few months and which have markets, decreasing their dependence on provided investment opportunities? the US. Today, Asia exports more to China Mobius: China is at the top, as are coun- IN THIS ISSUE: than to the U.S., which is still the largest tries related to China, such as Taiwan, and most influential economy. This U.S. Thailand and other Asian nations. We also like Mobius on Emerging influence has gradually diminished as Brazil because it is on the right track, as well Markets . 1 other economies continue to grow at much as South Africa and Turkey. Portfolio Manager’ faster rates. In South Africa, the macro-economic situ- Review . 7 3. Although the slowdown in the U.S. has ation wasn’t the greatest for a while, but now hurt Asian exports to some extent, it’s getting a lot better and is improving THE SCOTT LETTER: CLOSED-END FUND REPORT dramatically. Interest rates and inflation are Templeton Emerging Markets Fund coming down, and the retail sectors are Performance as of 12/31/2008 doing quite well. They are on the right track with a lot of resources. A new black 1-Year 5-Year 10-Year middle class is coming up, and I think they Cumulative Performance: NAV -57.22% 35.72% 109.50% will do all right despite a lot of political Cumulative Performance: Market Price -54.55% 17.94% 90.78% risks in Africa generally – but that goes Fund inception date: February 28, 1991 with the territory. We are concentrating on the consumer market such as the retailers. We like Turkey because they have unemployment benefits. They will spend SL: Was Putin behind cutting off the reached a loan agreement worth between $36.7 billion USD from the reserve fund to gas to Europe through Ukraine? $20 billion-$40 billion USD with the IMF maintain public expenditure. The Central Mobius: Yes, but they have another in December 2008. This agreement should Bank increased interest rates to ease pres- pipeline that goes further north to the help the country weather the financial sure on the ruble. Foreign exchange and North Sea to supply Europe. crisis and improve investor confidence. gold reserves remained high at about SL: That is true, but still Gazprom, a Interest rates were lowered recently to help $450 billion USD, providing the govern- state-controlled monopoly, cut off supplies the domestic economy, and transportation ment with resources to withstand the in retaliation for non-payment of its energy costs eased due to lower fuel costs. current market conditions. Lastly, the bills. This appears to be a further example However, Turkey’s future is dependent on European Union (EU) restarted suspended of the government harassing its neighbors. the economic recovery of Europe, its talks on a partnership with Russia.” [Editor’s Note: A similar shut-off in trading partner. It doesn’t help how poorly Russia is 2006 was met with near hysteria when it SL: Have you visited Eastern Europe treating Ukraine over energy supplies. caused a drop in gas pressure and spot lately and what is happening in Russia? Mobius: Russia is really trying to shortages across Western Europe. This We know that Eastern Europe has suffered become a country that is governed by the situation is happening again, although offi- under the global slowdown. My firm rule of law, but there still is a rising gap cials had claimed that gas bound for the CEFA has no exposure to this area. between rich and poor. West would flow without interruption, and Mobius: I was in Eastern Europe last SL: You might remember my Russian- Ukraine had enough gas stockpiled for the winter, which has been very cold in summer and will return later this year. We American friend, Anatoly Mikutin, who have offices in Moscow and in Poland. Europe. Source: New York Times] joined us for breakfast on July 4, 1997 SL: Russia is really in bad shape now SL: When we think of recovery in when we saw you at Hong Kong’s as its stock market has declined some 70%. Russia, we think of the oil prices. In the handover to China. He recently told me You must have had difficulty managing the last few days, oil prices recovered due to that his Russian friends say it is so expen- Templeton Russia Fund in the 2008 oil increased violence between Gaza and sive to live in Moscow now that many have price decline. Your most recent report Israel. I hope that geopolitical events are moved to St. Petersburg, which is not only shows you have about 6.1% of your assets not the sole reason for improvement in oil cheaper, but is a more beautiful place to in Templeton Emerging Markets Fund prices. What are your thoughts? (EMF:NYSE) as of August 3, 2008, prima- live. Are you aware of that situation? Mobius: That may be a factor, but the rily in energy, mining and telecommunica- Mobius: The cost of living is in supply/demand situation is such that prices tions stocks. Please update us. Moscow very high. That is changing, as will move up because the oil companies Mobius: We probably will increase it many people have moved into more are cutting their expenditures on explo- as we think that Russia will pull through. It reasonable accommodations. ration and production. Therefore, they will was hit badly by the decline in oil and gas Russia has been hit badly by the not be finding much new oil, but oil prices, but I don’t think that will last. There decline in gas and oil prices, but I think oil demands are still growing. There was a is still a rising gap between rich and poor, prices will continue to move up. Russia has “demand reduction” as a result of the but all boats have risen now. incredible reserves in the meantime. prices going much too high. SL: In December 2008, you wrote: SL: The situation will improve when We think an average price of about “The Russian government has oil prices move higher. We have read that $70-$80 USD a barrel is about right. announced measures totaling approxi- Putin has determined that he will destroy Many countries have begun to allow oil mately $185 billion USD to boost domes- the oligarchs “as a class”.
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