Mark Mobius, who oversees $30-billion in emerging-market equities at Templeton Asset Management, told I-Net Bridge on Monday that the relationship between the rand and commodities was not a simple one and that the key to reducing pressure on the balance of payments for a country was to add value to their commodities.
“Commodities are important to many countries. The relationship with the rand is not a simple one as while exports of commodities at high prices can support the rand they also lead to imports of finished goods and machinery which, if this leads to a current account deficit, places pressure on the currency,” he explained.
“Countries that are able to add value to their commodities reduce this pressure on their balance of payments,” he concluded.
Mobius said that one of the key challenges for emerging markets was if there were any changes to the current low interest, low inflation and high valuation environment.
“The world has seen a step change in liquidity. This has affected both first world and emerging markets with lower interest rates and inflation than in the past and higher valuations,” he explained.
“If this changes, then emerging markets and first-world markets will be affected.”
He also said that debt markets are seeing a rebalancing of return and risk perceptions.
“This can change significantly at short notice and is a result of both changes in first world and emerging market spreads and risk perceptions,” he pointed out.
Mobius’s reply came in answer to a question posed by I-Net Bridge about the debt sell-off by foreigners in South Africa so far this year — at last count to the tune of R2,4-billion.
This sell-off comes after huge purchases of R30-billion in 2006, yet equities recently enjoyed purchases of R1-billion in the week to January 12.
Many commentators have questioned whether the spread between emerging-market debt and first-world debt is too narrow for some investors’ taste.
He said there are four factors that are driving emerging markets: consumers, convergence, corporate governance and commodities.
“The consumer in emerging markets wants to build a better life for themselves and their children. This provides opportunities for companies producing goods and services for the consumer from financial services to motor vehicles and houses,” explained Mobius.
Mobius had said in a prior report that the biggest opportunities were companies that benefited from consumers’ growing affluence and willingness to spend.
The MSCI Emerging Markets Index, tracking 25 markets, ended 2006 at a record high of 912,65.
He said that while a period of consolidation could be good for emerging markets, the risk for investors was that the markets did not consolidate and instead continued to perform well.
“The people in the emerging markets and their energy and desire for a better life are still a powerful force for growth,” Mobius said, when asked about the outlook for emerging markets this year after a relatively poor start so far.
“In addition to this, emerging markets are well endowed with resources such as land and commodities. In most years we expect emerging markets to grow faster than first-world markets.
While the global economy at this stage still looks sound, a period of consolidation could be good for the emerging markets, but the investor must realise that there is a risk to having a low exposure to emerging markets as the risk is that the markets do not consolidate and continue to perform at similar levels to the past few years,” concluded Mobius. – I-Net Bridge