Franklin Templeton’s Mark Mobius has warned frontier markets may be due a correction after powering higher in 2016.
The executive chairman of the Templeton Emerging Markets Group (TEMG) described himself as “cautious” on the asset class as a whole in the short term, pointing to the weight of money which has entered the space in recent months.
The MSCI Frontier Markets index has risen 32 per cent in local currency terms from its lows last January, buoyed by better sentiment on emerging markets in general but also growing interest in the niche asset class.
“I would be cautious. You cannot expect consistent [high] returns from frontier markets,” Mr Mobius said.
“A lot of money has been looking for a home, and it is a relatively illiquid market. You can expect a correction along the way, but longer term it should do quite well.”
By contrast, Mr Mobius said his emerging market teams have increased their exposure to India and Brazil in their all-cap portfolios despite both countries’ stock markets also enjoying soaring returns.
On Brazil, he backed the reforms being implemented by president Michel Temer, despite the corruption inquiry engulfing the new leader’s party.
“He is a seasoned politician. The direction is right, but he has got to make changes fast, because things can change very quickly,” the manager said.
In India, Mr Mobius said that plans to open up state-owned enterprises could have a bigger impact than either tax reform or demonetisation, two topics which have attracted the focus of foreign investors since last year.
“The sales tax reform will take [a while], but could add another 1 per cent to GDP. It is the sales of shares of state-owned enterprises that could be a gamechanger, if [prime minister] Modi is able to do it.”
Mr Mobius said emerging markets benchmarks’ recent run, which has come against a backdrop of rising US interest rates, was proof that the relationship between the two metrics was not as simple as some have suggested.
He said it was the US economy itself that would have the biggest bearing on emerging market fortunes. As a result, the manager acknowledged that the asset class could face a headwind should President Trump prove unable to implement policies which would help the US to grow more strongly, such as an increase in fiscal spending.
The manager acknowledged that the rise of populist politics was on the increase in emerging as well as developed economies, saying there had “probably been a step backwards from the market economy model” in aggregate.
He predicted such movements would be short-lived, however.
“Turnover is going to be faster. People are going to wake up faster than before.”
Mr Mobius stepped back from a range of Templeton portfolios earlier this month, part of the firm’s succession planning, but said he had no plans to retire in full. He will continue to conduct research trips and company visits as part of his role.
“There is no big change; I will continue to do research, which is what I have been doing for quite some time now,” he said.
IN NUMBERS
30%
The MSCI Frontier Markets index has risen by 30 per cent since January 20 2016. This contrasts with the 32 per cent 2014 correction in the asset class, the last major drawdown
