Bullish on commodities for long term: Mark Mobius

May 19, 2011, 02.14pm IST

In an interview with ET Now, Mark Mobius, Executive Director, Templeton Emerging Markets Group, talks about emerging markets, commodities and inflation. Excerpts:

Emerging markets have underperformed developed markets for the current year. What do you think is the way forward for the emerging markets?

I have no clue. I cannot give you any predictions at all. I believe it will be positive. Economic growth in these countries is doing very well and there is no reason why the stock market should not reflect this positive movement. So, we are expecting positive returns, but I cannot give you a number in view of the fact that the markets have done so well up to now in 2010 and the middle of 2009.

So what weightage would you allot to emerging market stocks in your portfolio right now, and how different will that be this year compared to about two years ago?

It really should be about 32% of a portfolio for equities. So, I would say 32% would be all right. It is important not to look at the index because the index weightings show like 10 or 12, but the reality is that emerging markets as a percent of the world market capitalisation are over 32%.

There are two types of emerging markets. First, emerging markets like India and China where the domestic consumption demand is strong and they are net importers of commodities. Emerging market No. 2, Russia and Brazil, which are net exporters of commodities. At Templeton, which particular emerging market or which particular category of emerging market you are bullish on?

We do not look at the index. We are quite positive on Russia, in fact we have been increasing Russia and Russia has been outperforming the other markets.

How careful do you need to now be given the kind of volatility that we are seeing in the commodity space?

You have to be very careful and be willing to take a long view. Our approach is to go into stocks that are diversified, diversified mining companies with a few exceptions. Companies like Norilsk Nickel are so powerful with such low cost. It is worthwhile going in, but then we prefer to go into diversified mining companies.

What about other commodities, especially gold, silver and crude. Is there a bubble there?

Of course. There are bubbles all over the place, but the question is when they will burst. Bubbles are beautiful. And many of these bubbles will continue to remain so because of the demand-supply situation in these commodity areas.

How do you see the inflation playing out over the next 12 months?

There is no question that we are going to see inflation expanding in many of these countries. Many of the emerging market governments have moved quickly to raise interest rates to head off inflation, but there is no question in my mind that inflation will continue. And that's one of the reasons why we are bullish longer term on commodities because inflation will push up commodity prices.

One is getting a sense that the US retail/European retail buyers are back. What do you think that will do to developed market and especially for developed market investors?

If you look at the growth rate in emerging markets, this year on the average including some basket cases are going to be growing at three times faster than Western Europe, the US and Japan. So obviously on a per capita income basis, although the per capita incomes are much less, emerging markets are moving at a very fast pace.

To what extent do you worry about currency appreciation in that space, the effect not just on investing, but in corporate earnings as well?

Some of these emerging market currencies on a price-parity basis are overvalued. Now the question is whether they will come down or will continue up because it all depends on the inflation numbers in these countries.

We just have to watch the space, but up to now it has been rather positive because the direction of trade has moved more within the emerging market space than between the emerging markets and Western Europe and the US. Western Europe and the US are still very important, but more and more trade is going to China, India and these other countries.

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