NEW YORK - Foreign capital markets are poised for a dramatic turnaround that mutual fund companies could take advantage of by offering closed-end funds that invest in those markets, according to Mark Mobius, managing director at Templeton Asset Management Ltd. of St. Petersburg, Fla.
Closed-end funds, rather than open-end funds, are appropriate for these markets because there is not enough investment interest in emerging markets to support open-end funds, he said.
Mobius spoke at a closed-end fund conference here recently sponsored by International Business Communications of Southborough, Mass., a sponsor of investment management conferences. His remarks were transmitted via a video-conference call from Hong Kong.
Foreign markets declined dramatically last fall from their five-year highs, Mobius said. The Indonesian market declined 92 percent, the Malaysian and Korean markets dropped 87 percent, the Philippine market fell 81 percent and the Singapore and Brazilian markets were down 70 percent last fall from their highs, Mobius said. The Turkish market declined 69 percent, the Mexican market fell 68 percent and the Argentine market dropped 65 percent, he said.
While the stock market indices in some of these markets have begun to rise, they are still undervalued, and the sharp declines now present wonderful opportunities for investors, Mobius said.
The reason Mobius is so bullish on these beaten-down markets is that the large declines in their financial markets caused their currencies to be undervalued, he said.
Over the past year, these undervalued currencies have resulted in export surpluses, he said. In turn, these trade surpluses are now beginning to lead to rising foreign exchange reserves, he said.
"Money flows back in because of the trade balance and return of confidence," Mobius said. "There are many strategic and private equity investors coming to these markets."
Furthermore, the corporate restructuring and privatization that have taken place in emerging markets since these markets fell has made their businesses more productive and efficient, he said.
"The recovery is here, and this is just the beginning," he said. "In fact, I think the previous highs will be surpassed. We are very optimistic about these markets."
Because there is so much room for growth in emerging markets, these markets can outperform the U.S. market, Mobius said. This may sound implausible, particularly because of the strong economy that the U.S. is now enjoying, he said.
"But the fact of the matter is that the average gain during bull markets in this century has been 62 percent in emerging markets, versus 21 percent in the U.S. and Japan," he said.
Because the capital markets in emerging nations are trading at such low levels, as they begin to rise, the increases could surpass 300 percent, Mobius said.
"The percentages can play some funny tricks," he said.
For example, since plummeting 92 percent from 370 to 40 in July 1998, the Indonesian stock market index has increased 229 percent from 40 to 92, he said. If the Indonesian stock market index continues its ascent and once again reaches 370, this would be an additional increase of 304 percent, Mobius said.
Nations that appear to offer the greatest return on investment and that Templeton is watching most closely include Thailand, Indonesia, South Africa, Brazil and Argentina, Mobius said. Templeton is also carefully monitoring nations that are quick to adopt the Internet, which include Singapore, Korea, Thailand, China and Taiwan, he said.
Mobius said his optimism about emerging markets would quickly wane, however, if the U.S. market experienced "a 1987-like crash" or if foreign governments put restrictions on foreign investors.