Investment focus: news and views
Investing in... Mongolia
What is the fund?
Origo Partners, a private equity company based in Beijing and listed on the London stock market. The fund tries to invest in companies that will benefit from strong Chinese demand – including a number of commodity firms in Mongolia.
Why should I buy it?
The Mongolian stock market was the best performing in the world last year and has already grown 100 per cent in the first quarter of 2011 – and analysts expect more to come. The country is rich in undeveloped resources such as copper and gold – and with plans to roll out railways in the next five years, analysts believe this could be a big growth story. Origo is also the largest shareholder in ResCap, Mongolia’s only investment bank, which will help bring local companies to market.
Mick Gilligan, head of research at Killik, the UK stockbroker, recommends this fund to clients who are willing to take a high level of risk and want to diversify their portfolios in an unusual way.
Why shouldn’t I buy it?
Investing in start-up companies that have not yet come to market is always a risk – and even more so in countries, such as Mongolia, that do not have developed stock markets. Origo is also expensive – while shares have risen 42 per cent in the past year, they are trading at a premium of 17 per cent to the value of the assets. The fund is also heavily weighted towards commodities, with about 50 per cent in metals and mining, so there will be a commodity price risk.
Risky business
Emerging countries can have less liquid stock markets, and investors say corporate governance is still a problem. Anthony Bolton, the UK stock picker who set up a China fund last year, recently admitted that corporate governance was more of a problem than he had realised.
However, the situation is improving, with more companies paying regular dividends and grasping their importance to investors.
In the first quarter of this year, there was a net outflow of funds from emerging markets of about $20bn, amid fears over rising inflation and political risk – which is most evident in recent upheavals in the Middle East. Experts see the region as “politically explosive”, as more unemployed people are university graduates. Average unemployment in Middle Eastern and North African countries could be nearly 40 per cent among younger people, according to the International Labour Organisation’s Global Employment Trends 2011 report.
Pictet Asset Management is warning that profit margins in emerging markets must contend with higher input costs as well as government interference through price controls. However, Pictet argues that emerging markets are close to long-term averages, with stocks trading at a discount of about 10 per cent to those in developed markets.
Meanwhile, a report from Vanguard, the low-cost manager, recommends investors diversify across a range of emerging-market countries to spread risk. Its researchers studied factors including low valuations, gross domestic product growth and foreign currency appreciation, and found that “accurately selecting an emerging-market country that will outperform is difficult, at best”.
“When investing in emerging markets, diversification is key,” the report said.
The road ahead
By Mark Mobius
On average, emerging economies are growing three times faster than developed economies. They also generally have more foreign reserves and lower debt-to-GDP ratios than their developed counterparts. Private domestic consumption and government expenditure have at least partially offset the impact of decelerating export growth.
Each of the Bric countries has unique characteristics. Brazil in particular has been doing very well in terms of market performance as well as currency strengthening, while we are seeing growing awareness of the importance of corporate governance in Russia, China and India. The Next 11 countries (as identified by Goldman Sachs as being the next potential Brics) are interesting to watch. Bangladesh, for example, is a very poor country with many problems, but it is benefiting from low labour rates, while its agriculture sector and exports are growing.
Africa has bright prospects. The continent boasts abundant natural resources, of which only a fraction have been tapped. The Bric countries need resources and are willing to invest in Africa’s infrastructure.
Given the turmoil in the Middle East, we are monitoring the situation.
The Baltic countries – specifically, Estonia, Latvia and Lithuania – are also interesting. Their membership of the EU gives them an added degree of credibility and puts them on a path toward positive reform.
Mark Mobius is executive chairman of Templeton Emerging Markets Group and manager of Templeton Emerging Markets Investment Trust
Investing tip
Do not invest in an emerging country stock market just because the country’s gross domestic product is rising. Research from Vanguard, the low-cost fund manager, found the average correlation between long-term GDP growth and long-term stock market growth was zero.
What is the fund?
Origo Partners, a private equity company based in Beijing and listed on the London stock market. The fund tries to invest in companies that will benefit from strong Chinese demand – including a number of commodity firms in Mongolia.
Why should I buy it?
The Mongolian stock market was the best performing in the world last year and has already grown 100 per cent in the first quarter of 2011 – and analysts expect more to come. The country is rich in undeveloped resources such as copper and gold – and with plans to roll out railways in the next five years, analysts believe this could be a big growth story. Origo is also the largest shareholder in ResCap, Mongolia’s only investment bank, which will help bring local companies to market.
Mick Gilligan, head of research at Killik, the UK stockbroker, recommends this fund to clients who are willing to take a high level of risk and want to diversify their portfolios in an unusual way.
Why shouldn’t I buy it?
Investing in start-up companies that have not yet come to market is always a risk – and even more so in countries, such as Mongolia, that do not have developed stock markets. Origo is also expensive – while shares have risen 42 per cent in the past year, they are trading at a premium of 17 per cent to the value of the assets. The fund is also heavily weighted towards commodities, with about 50 per cent in metals and mining, so there will be a commodity price risk.
Risky business
Emerging countries can have less liquid stock markets, and investors say corporate governance is still a problem. Anthony Bolton, the UK stock picker who set up a China fund last year, recently admitted that corporate governance was more of a problem than he had realised.
However, the situation is improving, with more companies paying regular dividends and grasping their importance to investors.
In the first quarter of this year, there was a net outflow of funds from emerging markets of about $20bn, amid fears over rising inflation and political risk – which is most evident in recent upheavals in the Middle East. Experts see the region as “politically explosive”, as more unemployed people are university graduates. Average unemployment in Middle Eastern and North African countries could be nearly 40 per cent among younger people, according to the International Labour Organisation’s Global Employment Trends 2011 report.
Pictet Asset Management is warning that profit margins in emerging markets must contend with higher input costs as well as government interference through price controls. However, Pictet argues that emerging markets are close to long-term averages, with stocks trading at a discount of about 10 per cent to those in developed markets.
Meanwhile, a report from Vanguard, the low-cost manager, recommends investors diversify across a range of emerging-market countries to spread risk. Its researchers studied factors including low valuations, gross domestic product growth and foreign currency appreciation, and found that “accurately selecting an emerging-market country that will outperform is difficult, at best”.
“When investing in emerging markets, diversification is key,” the report said.
The road ahead
By Mark Mobius
On average, emerging economies are growing three times faster than developed economies. They also generally have more foreign reserves and lower debt-to-GDP ratios than their developed counterparts. Private domestic consumption and government expenditure have at least partially offset the impact of decelerating export growth.
Each of the Bric countries has unique characteristics. Brazil in particular has been doing very well in terms of market performance as well as currency strengthening, while we are seeing growing awareness of the importance of corporate governance in Russia, China and India. The Next 11 countries (as identified by Goldman Sachs as being the next potential Brics) are interesting to watch. Bangladesh, for example, is a very poor country with many problems, but it is benefiting from low labour rates, while its agriculture sector and exports are growing.
Africa has bright prospects. The continent boasts abundant natural resources, of which only a fraction have been tapped. The Bric countries need resources and are willing to invest in Africa’s infrastructure.
Given the turmoil in the Middle East, we are monitoring the situation.
The Baltic countries – specifically, Estonia, Latvia and Lithuania – are also interesting. Their membership of the EU gives them an added degree of credibility and puts them on a path toward positive reform.
Mark Mobius is executive chairman of Templeton Emerging Markets Group and manager of Templeton Emerging Markets Investment Trust
Investing tip
Do not invest in an emerging country stock market just because the country’s gross domestic product is rising. Research from Vanguard, the low-cost fund manager, found the average correlation between long-term GDP growth and long-term stock market growth was zero.
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