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Mark Mobius
By Darshana Abayasingha
Mark Mobius, the globally acclaimed emerging markets fund manager and Founder of Mobius Capital Partners LLP, last week said Sri Lanka must aggressively pursue privatisation of State-owned enterprises to boost its economy.
Templeton Emerging Markets Group former Executive Chairman Mobius, who is also known for his investments in real estate, in his private capacity bought an apartment in Colombo not so long ago, adding he likes to invest in places where he would want to live. “That’s the criteria I would use; if I like to live in that place, I would buy a property. Pricing is secondary, it is more about location and pleasant surroundings.”
Mobius was sharing some frank comments and advice during a webinar organised by John Keells Stock Brokers last week. He spoke from Munich, Germany where he has been spending the majority of the lockdown after traveling over from South Africa.
Mobius was very positive on Sri Lanka, as he joined an online conversation with John Keells Stock Brokers Head of Research Navin Ratnayake. “I am very interested in investing in the country. I think Sri Lanka has to move more aggressively with privatisation of State-owned enterprises, which I think will give an incredible boost to the economy,” he added.
He pointed to the UK for executing what he described as an incredible privatisation program, and amongst emerging market countries, Mobius identified Romania having good examples of privatisation with the State-owned oil company.
During the engaging hour-long of discussion, Ratnayake also asked Mobius if he believed the novel coronavirus pandemic had retarded the globalisation drive, and what would be the solution for countries that does not have scale to produce for a domestic market.
Touching on Sri Lanka specifically, Mobius felt that the island nation must first look at its domestic market, and meeting the food, garments and other requirements of its population. The country must first of all look at increasing production to meet domestic requirement, then look at exports like tea and services like software then tourism, he said.
“Lot of people think this (COVID-19) will end globalisation. I don’t think so. The incredible impact of the internet mean people can communicate around the world in an instant and this generates trade and tourism.”
“The lockdown is temporary,” he said, adding: “And as it ends we will see a pickup of services.” However, in the case of Sri Lanka, the country must specialise, he said. “You want to emphasise higher-end tourism not mass tourism, and this can be very profitable at the end of the day. He also stressed the importance of high labour input products like garments, adding that specialisation is with these products where we could add value.
Ratnayake also posed for Mobius’ views on new monetary policy frameworks and their importance for growth?
“Too much emphasis is put on a Central Bank’s ability to solve problems. Central banks are not in a position to recover an economy or solve all these economic problems. But unfortunately, people depend on central banks to do something.
“So central banks keep on printing money, and buying commercial bonds and this infuses a lot of liquidity into the market. The result of that is not inflation but devaluation of currency, because nowadays no one knows what the real money supply is. It will look like prices are rising but technology is keeping up with these changes and products are getting better and better and services.
“In fact, we are in a deflationary environment rather than an inflationary position. It is unfortunate that Central Banks are put in that position because they really cannot do much. What can help the economy is putting people back to work.
“Reducing unemployment, that’s the reason I believe this lockdown has to end. Otherwise these economies will not recover. You can put a lot of money into banks but banks will question where do I lend and why should I lend to a company that is going under? The solution is not more money, the solution is more jobs.”
Speaking of tourism and investment sentiments, Mobius opined people will be back to travelling again soon. In relation to investments, he explained reactions to COVID-19 differs from place to place and sector to sector.
He added that generally, his company’s focus in the post-COVID era is on healthcare be it hospitals or pharmaceuticals and then technology in general. With internet traffic increasing, there will be increasing demand for hardware and software, so they look at companies doing any kind of fabrication of smartphones or software.
The third area of interest is in consumer-oriented industry, those who have adopted software and technology of the internet. Many offline companies have adopted online selling and this is going to be the future. Offline will continue to be strong, but online will be boosting profits, he said.
“The focus on Environment, Social and Governance is becoming very important to investors around the world. More and more private and institutional investors are looking at companies with good ESG scores.
“Our ethos is to help companies improve and improve their scores particularly with Governance. We work with companies on this aspect and show that their stock price goes up as a result. With COVID-19 these have become much more prevalent, now you are seeing a lot of focus and emphasis on environmental solutions. In China for example they are looking at this aggressively.”
Mobius also added that the oil price drop during the height of the pandemic spelt good news for importing countries, but predicts prices to increase as lockdowns end, whereby prices will stabilise around $ 50 to 60. The biggest use of oil is in the transportation industry. Despite the advent of electric automobiles, the great mass of transportation depends on oil. As the lockdown ends the demand for oil will increase.
Ratnayake also asked of the sharp increase of the dollar and the depreciation of the rupee. Whilst putting pressure on our capacity to service sovereign debt bonds, he observed that the devalued rupee doesn’t necessarily help competitiveness and add value to exports.
“The dollar has been strong and will remain strong because that is the key currency for foreign exchange, we deal in. But this will diminish as we go forward. And you can see this with the Chinese becoming more and more relative with trade, this is the objective of the Chinese Government and the euro is also still around and is used.
“I think going forward the dollar’s strength will wane, and other currencies will come forward. The interesting thing is if you look at the emerging market currencies, they have not declined that much against the dollar.
“The rupee has been actually remarkably resilient and relatively stable in comparison to some others, particularly if you look at last year. If it’s a single digit change to currency it is not too big a problem. If you see significant weakening that could be good for tourism and exports, but you don’t want big swings in currency. But I think the rupee has been relatively stable,” Mobius said.
He also lent his opinion to a question on the ongoing trade conflict between the US and China with Trump at the helm. “What do you see the future of that relationship being, do you feel that will continue be a source of tension, and will there be a change if there is a new presidency?” Ratnayake asked.
“I think it will continue to be a source of contention between the two countries, but with some changes taking place. Basically, what Trump is asking for is reciprocity. In other words, if we will allow your goods to come into our country, you will also allow our goods to go into your country.
“He is openly saying he is ready for free trade. Right now, it is an unfair relationship. One of the impacts of Trump’s policies is that countries around the world are beginning to wake up and realise that maybe they are not having a fair relationship with China or whatever other country they are dealing with.”
“I think there will be more unilateral trade agreements in the future rather than multilateral trade agreements. The WTO and other multilateral organisations have blanket policies that apply for everybody, but then this results often in unfair relationships.
“I believe that world trade will not diminish, it will continue to grow but there will be more unilateral agreements to make it fairer. I believe negotiations between the US and China will continue; it will be contentious but at the end of the day they will come to some sort of agreement that will benefit both countries.”
Thailand and Vietnam role models
Mobius picked Thailand as a good example of a country that surprised him with sound policy and actions, but also pointed to Vietnam as a strong new force and a dramatic example where a one-party state moved from extreme communism to an open economy. The results have been quite exceptional alongside significant growth.
Commenting on climate change, the Fund Manager felt that as we study climate change more and more, they will realise there are certain long-term trends that are not reversible. The policies will probably change and as we sort of reset it, he said.
If you look at countries and regions for investment do you look at the country first and then the company, and have you been more comfortable investing in certain sectors more than others? Ratnayake posed to Mobius.
“We look at the country policies, and we look at foreign exchange control which is very important if you are an outside investor. You have to look if you put your money in can you get it out again? Also, liquidity in the stock market is important to us. It’s in conjunction with the individual companies. We will look at a company and then we look at how government policy is impacting that company.”
“The fund management industry has changed a lot. When we began running the Emerging Markets Fund, there was no real index there were only six or seven countries in which we could invest. The scope has widened dramatically now. We were forced to look at the index and make sure we were not too far away from the index.
“Now there is realisation that managers should not be just following the index but acting more independently. Now instead of looking at index stocks, we are looking at small and medium stocks that may not be there. This is what clients are demanding of us.
“Index funds are mechanical, so we have had to change our behaviour. More funds emphasise active management. We become true owners of the stock, and we should take interest in what the company is doing on a day-to-day basis. We are looking at smaller sets of stock with higher weightings.”
“What drives stock prices are earnings growth and expectations of earnings growth. What we have got to do is try locate companies that will grow in double digits in dollar terms and pay dividends, going forward.
“Certain sectors we tend to stay away from. Banks by the way are generally difficult because nobody will really tell you what the bad loan situation is. Then you have to be careful with mining companies and natural resource companies. You have to get companies that have an internet strategy for their business nowadays,” Mobius advised.
