Dr Mark Mobius talks about the growth potential of emerging markets.
Philipp: Hello, and welcome to another episode of In Your Best Interest, your personal finance podcast. I'm your host Philipp Muedder, and with me today is the true legend, the one and only Mark Mobius. Dr. Mark Mobius is known as the founder of the emerging markets asset class and one of the most successful and influential managers over the last 30 years.
In May 2018, he launched Mobius Capital Partners, an asset manager that aims to improve governance standards in emerging and frontier market companies. Before that, Dr. Mobius worked at Franklin Templeton Investments for more than 30 years. During his tenure, the group launched several emerging market and frontier funds focused on Asia, Latin America, Africa and Eastern Europe.
He’s won numerous industry awards and received his PhD at MIT. Dr. Mobius is also the author of several books, and his recent publications include The Inflation Myth and The Wonderful World of Deflation. Mark, it's such a pleasure to have you on the podcast today.
Mark: Thank you.
Philipp: They call you the Indiana Jones of emerging markets investments, so this nickname should say it all, and we're really excited. On this podcast, we had different asset class specialists on - from Gold to just ETFs in (02:00) general, crypto, other spaces as well. And being a personal investment podcast and personal finance podcast, our listeners are always very interested to learn from experts about the different asset classes.
And I think emerging markets are one of the things that everyone is always very excited about, yet little is known, and things change rapidly in emerging markets as well. So really great to have you on and learn from your past and history of investing in that asset class for such a long time.
Before we do that, Mark, we usually ask a few questions that are a little more personal and go back in time to see where you come from and get the audience to know you a little bit better. So one of the things that I always ask is, do you still remember what you did with your first paycheck? Your first real paycheck out of college?
Mark: That's a good question. Because I remember, I remember that I went to school working. Basically, I had to work my way to school because our family didn't have the money to send me to college. So I was on scholarships, and I worked waiting on restaurant tables and doing all kinds of odd jobs. I even was playing the piano in bars at one point. And the first time I had an experience with investing was when I did my PhD thesis on communication satellites. And at that time, COMSAT was being launched. That was during the Kennedy administration, and they launched the Communications Satellite Corporation of America, COMSAT. And I invested in that company when it was launched. So I made a little money there, and that was my real first experience in investing.
Philipp: Oh wow, super interesting. So how does someone come from a PhD thesis in communication satellites to being an investor in the emerging markets? What was kind of like, how do you become an investor from there? (04:00)
Mark: Well, the interesting thing is when I finished my PhD at MIT, I really didn't know what I wanted to do. Because I've been sort of a professional student, and I realised that I had to be in some profession where I could be interested in anything, I could learn about anything.
And investing is ideal for that purpose because, as you know, we can be investing in any kind of company. Whether it be a toy company, a tech company, a land company, whatever, it's a great thing for me because we are always learning, always finding new things, and that's perfect for my interest.
Philipp: Very interesting. So what was your first job then in the fund management world?
Mark: The very first job in the fund management world was with a broker. I was living in Hong Kong at the time, and I got a job as an analyst with a broker, Vickers da Costa, a British broker at that time.
And that was the first time I was involved in actually analysing stocks. But then I went on to Taiwan to head up the International Investment Trust in Taiwan, which was the first time I had the experience of actually managing a fund. It was the ROC Taiwan fund.
Philipp: Yes, interesting background there, Mark. So, they call you the Indiana Jones of emerging markets, so you earned that nickname over a long period of time, right?
I think in ‘87, I think you joined Sir Franklin Templeton's company and the emerging market desk there, and grew this really from like a smaller part of 100 million, to billions of dollars in the end, right?
When you first arrived, what was emerging market investing like? Or what were you actually investing in? Or maybe even for the audience to understand a little bit of the background of emerging markets a little bit better, what is it in general first?
Mark: (06:00) Yes. In 1987, emerging markets were just beginning. You must remember that at that time, the International Finance Corporation coined. One of the gentlemen at the IFC coined the term, emerging markets. Because before that, these markets were considered the underdeveloped, the poor, the Third World, all of these sort of negative sounding names. And the IFC came up with the name emerging market. And the very first listed fund was our fund, the Templeton Emerging Markets Fund listed on the New York Stock Exchange.
Before that, the IFC had launched an institutional fund, an international institutional emerging markets fund. But then, we were the first to be listed on the New York Stock Exchange, and that was the beginning. And by the way, we raised 100 million at that time.
And frankly, most of the markets in which we are invested today were not open. You must remember at that time, most of the countries were either socialist, communist, or were dictatorships - which did not allow outside investments.
So we had to really search around. In those days, we had only 5 markets in which we could invest; now, of course, we have over 70 markets where we can put money in emerging markets. And you must remember also Russia was a communist state, China was a communist state, so many other countries were just not available, did not have markets.
Philipp: There are no markets at all, exactly. So how were you even able to invest in the first place over there?
Mark: Well, luckily, we had a few markets like Hong Kong, Singapore, Philippines were open, Mexico we could invest indirectly through the New York Stock Exchange. There were a few markets like that.
And then, gradually, more and more markets were opened as the (08:00) World Bank, the IFC, and all these international institutions urged countries to convert into a market economy system. So the whole idea of adopting a market economy was, to a great extent, due to the work by the World Bank and the IFC, these international organisations who finally realised that in order to grow, you've got to have a market economy? And of course, the best example of that is China.
Philipp: Yes, absolutely. So then you must have had as a fund manager, you obviously meet the CEOs of companies, right? You meet government heads. What were some of the, especially in the late 80s, early 90s, this was like obviously the Wild West, right? So in these countries that you travelled in, like, you said dictatorships, communist countries, South America, Asia. Do you have a couple of stories that just stuck with you still to this day?
Mark: Well, yes, there were many opportunities to meet country heads and people that were prominent in the various countries. And very often, we'd go into their offices and say look; we'd like to invest in your country. And of course, the first thing many of them would say, I remember in one case in Latin America, they said what do we need your money for?
We have enough money of our own, and we don't like foreigners to come in to take over our companies. So that was the kind of attitude you had. And of course, when you asked them that they should list their state-owned companies, they were very resistant.
But finally, things began to change, and we were able to successfully persuade them to list state-owned income. Of course, state-owned enterprises were the largest companies in these countries.
Philipp: Yes. And from a travel perspective, any crazy story there? Like remote, like some adventurous story that you have from back in the days? (10:00)
Mark: Yes. Well, one time we were flying from Hong Kong to London over Russia, that was the shortest way. And the windshield, we had a plane, and the windshield on the plane cracked; it was hit by something. So we had to land in Russia, in Siberia, and the problem was that although I had a Russian visa, the pilots did not have a Russian visa.
So they wouldn't let us in the country. But they allowed us to sleep on the plane or in the lobby of the airport, so we ended up sleeping on the plane. And the next day, the technicians said that you could fly but at a low altitude in order to get the windshield fixed in Europe, and so that's what we did. So we've had incidents like that.
Philipp: That's where the Indiana Jones name comes from, so there we go. Hey, but Mark, going back to emerging market investing, right? So if people come to you and say, hey, why should I invest in emerging markets? What are the potential benefits of investing in emerging markets that you tell them usually about?
Mark: Well, first of all, emerging market countries represent the largest portion of the population of the world. China has over 1 billion people, India has 1 billion people. So if you compare that with the developed countries United States, Europe, Australia, New Zealand, emerging markets are tremendous in terms of size.
And also, in terms of land area. You've got this incredible land area in Africa, in Russia, India, China and so forth. So if you're not investing in emerging markets, you're losing out on what's happening in a large part of the world, more than half of the world. So that's the first thing.
(12:00) The second thing, probably even more important, is the fact that emerging markets are growing at double the rate of the developed countries. So if you're not investing in emerging markets, you're giving up an incredible amount of growth that's taking place in these countries. And finally, one of the most important aspects of investing is diversification; the way to protect yourself against big downturns in any particular market is to diversify away from one market.
And finally, with more markets and more companies you're looking at, you have more opportunities to succeed. So emerging markets really should be part of an investment portfolio, and I would say probably about half of anyone's portfolio should be in emerging markets either directly or indirectly. By the way, if you look at the S&P500, for example, you'll find that many of those companies have a substantial part of their earnings in emerging markets. So you can get some exposure that way, but direct exposure is the best.
Philipp: Oh, that's great, those are great points. One of my follow-up questions from that, you answered a part of it already is - what role do you think emerging market equities fit into people's overall portfolio right?
In terms of allocation, time frame and risk tolerance. So I think allocation you already said, you kind of think like half of the portfolio should already be in emerging markets, and you get some of that exposure.
Because even Apple, Amazon they're all selling also into emerging markets, right? So you have that exposure there. But in terms of time frame and risk tolerance, how do you see it fit into a regular person's investment portfolio?
Mark: Well, in terms of time frame, it's very important not to try to time the market because no one knows. There is no one in the world who can (14:00) predict where any particular market is going. So the best way to do it is by regular investments. In other words, take a certain amount of money each month, and put it into the markets. And this way, your returns, you'll be investing at some point at the high point, sometimes at low point. But in the long term, you'll do very well. So it's very important to dollar cost average as we say.
The other thing is that you've got to, as I mentioned, be diversified. In other words, don't focus on any one market or any one company, but diversify across all companies in all markets. Now that doesn't mean you have to have a thousand companies or every single country in the world. But if you do your homework and look at companies with low debt, high earnings growth etc. And focus on 30-40 of those stocks; you should do very well.
Philipp: Would you then say for retail investors, is it best to get exposure through ETFs? Or active fund management? Or should they look directly into investing in some other companies?
Mark: Well, most people don't have the time or inclination to look at individual companies because that takes a lot of work. So ETFs are a good solution if you diversify among different types of ETFs. Luckily now, you can get exposure to countries, sectors and many variations to have a diversified portfolio. But on the other side, I think investors should have some access to active managers because very often, good active managers will outperform any particular index. So again, you have to have a mixture of both.
Philipp: Yes, that's great. And moving back into the different markets that you mentioned, (16:00) there are lots of interesting places. You said Africa, Asia as well. How do you evaluate which one of those countries is the best one at this potential time right now or maybe in 5 and 10 years from now? Where do you see the growth happening more?
Mark: Well, if you look at the portfolio that we have in our funds, you'll see that India is now at the largest portion, about 20% of the portfolio. Then followed by China, Taiwan, Korea, Turkey, South Africa, Brazil and even Kenya.
Now that's driven primarily by companies; in other words, we search the world for the very best companies. And these companies can be anywhere; they can be in the so-called frontier markets in Africa, they can be in Asia, Latin America, and Central Europe etc. So the key should be the companies.
Now, of course, you've got to be cautious about countries because if there are foreign exchange controls or other restrictions that will not allow you to get your money out, then you don't want to be investing in that country. But other than that, after that macro view, then you should really focus on individual companies.
Philipp: Yes. And you just mentioned the country risks that you face as well. So I think a lot of people today, our company being headquartered in Singapore, and in markets like Thailand, Hong Kong, the UAE, Malaysia - people are kind of worried about what they're seeing in China right now with the crackdown on the bigger companies, right?
So people are worried like, oh if you invest in China, you never know. The government can just come down on the company I own or in the companies that the ETF owns, or the fund manager owns. How do you put that into perspective? Do you see an opportunity in that crackdown? (18:00) Or do you see this as a big worrying sign for investing into China?
Mark: I see it as an opportunity because it's a signal that the Chinese government is now trying to get governance in view. In other words, they're trying to prevent the problems that the US and other countries have had in terms of dominance of various companies. The reason why the anti-trust legislation was passed in the United States was for that very reason. Big companies began to gobble up small companies, and the small companies, medium-sized companies, did not have an opportunity to compete because the big guys were controlling everything. So the Chinese are looking at that and realising it's not very good for the market. If you have the dominance of a few companies in any particular sector, that's number one.
The other thing they're looking at is trying to even out the playing field. So, for example, in the medical area, they're saying, look, we want to have relatively inexpensive medical care. And therefore, we want to crack down on excessive prices for medical equipment and that sort of thing.
Now whenever a government does something like this, they're going to be winners and losers. In other words, it's not all going to be a losing proposition. So, for example, in the medical area, some companies that have very high costs and high prices will be disadvantaged whereas companies that are able to compete with lower costs will do very well. So what you've got to do as an investor is look at where the opportunities are as a result of the government crackdown in any particular area. And that's what I see now in China. There are going to be more and more opportunities in the smaller and medium-sized companies as a result of the government going after the dominance of the big players.
Philipp: And that's great to hear. I think that you're seeing (20:00) opportunities where other people see threats at this moment in time, right? So long term, you still are pretty bullish on the China case, right?
Mark: Exactly. I think investors that are very scared about this so-called crackdown in China must look at their own countries and realise that the same thing has happened in various countries around the world at different times. And when it did happen, it opened up opportunities for a number of other companies.
Philipp: Yes, learning from history. I think that's where you come in with all your experience in these emerging markets. You've seen it pretty much all over the last tens of years, so that's great to hear from you. If we move on from there, so you set your portfolio currently at Mobius Capital Partner's top two countries in India, and China, and Brazil, you also have Kenya in there.
Within those countries, any particular trends in the companies that you invest in that you feel more bullish about than others? Or what is that kind of like your favourite trend within the emerging markets currently from the company perspective and what they do on a day-to-day basis?
Mark: Well, I would say the individual trend that is most dominant today is the advance of technology. The advances and improvements that have been made in almost every field coming out of technological change has been quite remarkable.
So, for example, you know today, there are chip shortages, there are semiconductor shortages. So we have invested in companies that do the software for semiconductors. We've also invested in technical companies that do the hardware, connectors and cables, that sort of thing. So the technology area is one big area that is growing at a rapid pace, and in which we're interested. The other area is education.
As you know, around the world, with the spread of the internet, (22:00) people are learning more and more about what's happening in the world, and have ambitions to become educated. So there are a number of education companies listed in emerging markets that are doing very well.
The other area is medical; now, of course, with COVID-19, there's been an explosion of interest in testing and the medical treatment. But even beyond COVID-19, the need for medical care globally is increasing by leaps and bounds. So we're investing in medical testing, medical equipment and that sort of thing. Anything related to healthcare.
Those are the big areas, and of course, there are many others that we're looking at, particularly consumer products that are being sold on the internet. So we're finding a number of companies that do both offline and online selling, and that's growing at a rapid pace.
Philipp: Cool. And then compare that to the developed world, right? Do you see any diverging trends between what the developed world is going through right now versus the emerging market? Or is technology really helping the emerging markets to catch up quite quickly to the developed worlds?
Mark: That's very interesting to see how emerging markets are embracing technological change much more rapidly than the developed world. Part of that is the regulation in developed countries is greater, and therefore more difficult to innovate for a number of companies. But if you just take one simple statistic, where are the largest number of smartphones around the world? Not the United States, not Germany, not Europe, but China, India and emerging markets generally. (24:00) Second question, where is fintech most advanced? Well, if you go to China and you try to pay a bill in cash or even with a credit card, you may have some problems. A lot of people are just paying with their phones. You don't see that so much in Europe and other parts of the world. But this is an example where emerging countries are advancing much more quickly in the technological sphere.
Philipp: Yes, absolutely. I think having grown up in Europe and lived for 12 years in the US and over the last 7 years now between India, I lived for 2.5 years in India, then now 4.5 years in Singapore. I always tell people, and they say, why do you like it over there so much? I said, hey, people are looking positive to the future, right?
Even through COVID, I think people are still excited about the future. Whereas when I travel back to the US I was just there; you feel everyone is a little down and negative about what the next 5 to 10 years hold whereas if you look at or talk to anyone over in the Asian markets, it is always like, hey, well everything is still OK, it's going to be OK, right? We need to get through COVID-19; after that, hopefully, it goes back up. But the positivity, do you see that as well when you talk to companies and the CEOs and governments of these countries?
Mark: Yes. The interesting thing about emerging markets, and by the way, one of the reasons why they're growing faster than developed countries is that the population is young. You have a larger proportion of the population in the young, below 20 years of age group. And that's having an incredible impact on the stance of these countries. They tend to be more optimistic, more oriented towards growth, towards education, that sort of thing. And I think that's probably one of the reasons why you see this difference.
Philipp: Yes. And then one of the other things, do you think (26:00) Bitcoin or the crypto space in general, right? Is that an emerging market? Or how do you classify that in terms of an investment thesis for yourself? Why I'm asking this is being in Singapore now for the last 4.5 years, right? Going through 2017, the big spike in crypto. The government is embracing a lot of the startup scene for the crypto space as well. And I feel like when I talk to the younger colleagues and colleagues in Malaysia and UAE, a lot of them seem to be very excited.
Do you think that it's just a current fad, or do you see this as being part of a sophisticated, like a retail investor's portfolio exposure at some point?
Mark: Well, you must differentiate between cryptocurrency and digitalisation of currency. Now, the digitalisation of currency is taking place, and I just gave an example. I mean, you can now pay with your phone, with an electronic signal. So that is taking place and developing at a very fast rate.
But the cryptocurrency is going to be in trouble, in my view, because governments around the world will not allow their sovereign currency to be replaced with cryptocurrencies. So I think people have to be very cautious when they look at cryptocurrencies. Because the growth in price of, let's say, Bitcoin or any of the other cryptocurrencies is really based on who else is buying.
In other words, it's a belief in a particular currency that drives it rather than its utility. Although, the transfer of money from one place to another, either illicitly or legally, is one application of cryptocurrency. But anybody who does that realises that the cost is high. (28:00) So I would say cryptocurrencies should not be part of anybody's portfolio, and I say that knowing that a lot of my friends have made money, or at least they think they've made money on cryptocurrencies, but I think you've got to be very cautious. I myself do not invest in cryptocurrencies.
Philipp: Good to know, and I think it's a good point of view as well. So if people want to get excited about investing in emerging markets, you read, you not only read, but you also wrote a lot of books on guides on emerging markets and investing. Is there any particular book of yours that you'd suggest to people if they want to learn more about this asset class?
Mark: Well, I think my latest book, The Inflation Myth and the Wonderful World of Deflation, is an introduction to the whole concept of inflation 's impact on emerging markets and developed countries. The other book, Invest for Good, is another book that tells about my experiences in emerging markets. And then finally, The Little Book of Emerging Markets is probably a very nice primer for those people who want to get a quick insight into emerging markets. I would say those were the ones you may want to look at.
Philipp: For sure. We'll put the links in the show notes below as well. So for anyone that wants to learn more about those, feel free to get those books from Mark to learn more. Before we wrap it up, I think you just mentioned that book on inflation, right? Inflation is becoming a hot topic again this year. So obviously, everyone is worried; there have been 2 consecutive months or quarters now in the US where inflation is spiking a little bit. What impact do you see this having on the emerging markets and frontier markets right now?
Mark: Well, that impact is really psychological. In other words, people look at the CPI, the Consumer Price Index, as a measure of inflation. And as I point out in my book, it's not a very good measure. (30:00) In fact, it's quite inaccurate in the sense that the basket that they use for measuring CPI is changing over time.
So you're really comparing apples and oranges. What you really should be looking at is money supply. And if you look at the US alone, money supply M2, one measure of money supply, is growing at over 20% on an annualised basis. So inflation should be going up at least by 20%.
So the CPI is not a good measure. However, again as I pointed out in the book, as a result of technological change, the cost of goods and services is actually going down in real terms. I know people say, oh, the price of gasoline has gone up, or the price of bread has gone up. But they forgot to remember that their earnings have also gone up. So as I pointed out in the book, earnings and salaries have kept pace with the higher prices of goods. But people have got to remember that inflation or the higher prices of goods as a result of enormous money supply growth is going to continue. And the best way to protect yourself is to be invested in equities.
Philipp: Yes, buying assets, right? In general, keeping up with inflation, important. Like you said, equity investments, a big part of everyone's portfolio. You said you don't have cryptocurrency in your personal portfolio, but what is in your personal portfolio? Can you share from a high-level for people so that they can understand what Mark is investing in these days?
Mark: Well, first of all, I have most of the assets, investing assets in equities, individual equities. I have a lot of money in my own funds, and then I have other companies in developed and emerging markets, as well as funds. (32:00) Some ETFs, some diversified actively managed funds, that's the number one part of my portfolio.
I have cash; I always have cash available to wait for those opportunities like we had last year in March; February/March of last year was a great opportunity to invest. I have some Gold, about 5% of my portfolio in Gold. And property, I invest in property in various parts of the world. That's a good way to maintain your assets and also to prevent yourself from moving too quickly. Because property is relatively illiquid, and that prevents you from making mistakes.
Philipp: And harder to price the market, right? So I think that always helps people too. Because they're never so worried about their housing price - if it's falling or not on a year-to-year basis, but when they see the investment, of course, they're like giddy, and hey, let's make a change, right? Quickly.
Philipp: That's great. Well, then, thank you so much for sharing this. I think you praised earlier the importance of diversification, and you're actually practising it as well in your own portfolio. So I think hopefully, that makes people really start to believe in it more and let the time be on their side, right? Invest for the long term, have conviction in what you invest in, and then over any 10-20 year period, if you invested in equities, it should work out quite well for you.
Philipp: Well, Mark, hey, it was such a pleasure speaking with you today. I'm really happy that we got this opportunity to have you on.
Mark: Yes, look forward to it, thank you very much.
Philipp: Thank you.
In this episode, Dr Mark Mobius shares why you should invest in emerging markets, how investors can benefit from China’s regulatory crackdown, and the emerging market industries set to succeed.
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