Why Mark Mobius thinks US equities haven’t bottomed out — and where he sees emerging market opportunities

The US markets have provided a lot of excitement this year to keep investors on their toes. But while US and European equities have performed negatively since early 2022, emerging market equities fared worse.

But as the US dollar retreated from its multi-decade high over the past month, investors, including Allianz’s Mohammad El-Erian, pointed out that valuations in emerging markets have reached “historically low” levels.

When asked about his outlook for emerging markets, Mark Mobius, a pioneering investor who helped build Franklin Templeton’s emerging markets business before launching Mobius Capital Partners, said that although the overall tone this year was ” generally negative “, there are still many opportunities to be found in the emerging market space.

“We are finding good companies in all regions”

To be sure, the underperformance of emerging market stocks is nothing new.

The MSCI Emerging Markets 891800 Index,
+ 0.15%,
an indicator that includes the shares of companies in more than 20 of the world’s largest markets in Asia, Latin America and Africa, is down 18.4% compared to the 13.4% SPX of the S&P 500,
+ 1.56%
year to date. Over the past 10 years, the MSCI EM index returned only 36.9% in US dollar terms, while the S&P 500 returned 264.5%, according to FactSet data.

Within the index, performance has varied widely and past performance does not determine future returns. When asked about his prospects for each region, Mobius said it would be “impossible to generalize” but that he sees investment “opportunities” around the world.

See: Because the US equity rally is starting to look like a new bull market, according to these analysts

“We are finding good companies in all regions,” Mobius said during an email exchange with MarketWatch.

When it comes to individual countries, Mobius said they favor India among the major emerging market players and see opportunities in Kenya and South Africa among the smaller emerging and frontier markets.

Any investor looking to invest in the emerging markets space should keep in mind some important prerequisites.

“The key is the currency situation and the country’s ability to repay debts and our ability to obtain [U.S. dollars] out of the country when we want to liquidate holdings, “Mobius said.

At the enterprise level, Mobius looks for companies with strong pricing power and “little or no debt”.

Since the beginning of the year, the financial crisis in Sri Lanka has fueled fears that other frontier markets may experience something similar as the strong dollar and high commodity prices weigh on the finances of countries that mainly import commodities such as Petroleum.

See: Stock market rally is “fragile” after investors hoped earnings “patches would be robbed,” says RBC

Although there are some exceptions: the currencies of energy producers Mexico USDMXN,
+ 0.11%
and Brazil USDBRL,
+ 0.02%
held up very well: the dollar rose more than 6% against the Indian rupee USDINR,
+ 0.02%
and Chinese yuan USDCNY,
+ 0.00%.

Investing in emerging market equities likely means investing in Asia, which is home to by far the largest share of publicly traded companies represented in the MSCI index.

Taiwan Semiconductor Manufacturing Co. 2330,
+ 1.83%,
the semiconductor giant that is a critical link in the global technology supply chain has the most weight of any company in that index.

Outside of Asia, Brazil has the largest weight, with Brazilian companies accounting for over 5% of the index’s market capitalization. According to Dirk Willer, chief executive officer of Dirk Willer, chief executive officer of Dirk Willer, one of the reasons for this unbalanced representation is that Latin American economies have more of a “fixed income culture”, which makes them more represented in emerging market bond indices. and less in the stock indices strategy for emerging markets at Citigroup.

Chinese equities have performed particularly poorly over the past year as investors dumped the country’s top tech stocks in the midst of a Communist Party crackdown on the industry.

The KraneShares CSI China Internet ETF KWEB,
+ 2.06%
it’s down more than 23% so far this year as investors fear that ruptures in China’s housing market could metastasize into a broader financial contagion.

While he expects Chinese tech stocks to rebound soon, Mobius said foreign investors should approach Chinese stocks with caution.

“There will be some recovery in those tech names, but the overall tone of the market is not good in view of the disastrous housing market,” Mobius said.

With House Speaker Nancy Pelosi’s recently completed trip dominating the headlines this week, is Möbius worried about the additional strain he could put on bilateral relations?

“The impact [of Pelosi’s visit to Taiwan] the tension between the United States and China will steadily increase on all fronts: trade, investment, education, etc. There is growing competition in all areas with technology and weapons the most salient, ”said Mobius.

US stocks have not yet seen the low

Turning to a discussion on US equities, Mobius said he still thinks there will be more pain for investors, even as the shares rebounded in July.

“We probably have another step back as the Fed continues to raise rates,” he wrote. “I expect rates to go up a lot and that means a number of companies will be in trouble and glamorous tech stocks with no earnings and dependent on more and more cash inputs will be in trouble.”

Mobius added that he will not feel comfortable calling the minimum until he sees “complete surrender”.

“Of course we need to realize that we are already in a bear market, but the endgame requires full surrender from investors. At the moment, there is a lot of hope. ”

US stocks rebounded Wednesday after consecutive losses. The Dow Jones Industrial Average DJIA,
+ 1.29%
was on track to recover from the previous day’s 400-point loss, while the S&P 500 and Nasdaq Composite COMP,
+ 2.59%
they were both on track for strong earnings.

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