Legendary emerging markets maven Mark Mobius may have retired from Franklin Templeton as executive chairman in January, but the 81-year-old still plans to remain active in the industry. The investment expert's next act: a new firm to set its sights on investment in China and other emerging and frontier markets.
According to Mobius, China's annual legislative sessions are under way, and there are great investment opportunities in the world's second-largest economy.
On Sunday presidential term limits were abolished, allowing President Xi Jinping to remain in office indefinitely. Mobius said this policy change could have a positive or negative investment impact, depending on how peoples' lives are influenced and how the economy develops. "But a strong, stable leadership usually is relatively good provided that the population is happy," Mobius said.
Mobius joined a Franklin Templeton predecessor firm in 1987 to launch Templeton Emerging Markets Fund. He ran the firm's emerging markets team until 2016 when he passed on his role as chief investment officer to Stephen Dover. As executive chairman he oversaw around $50 billion in investments. Now Mobius says he left to start a new fund management firm, Mobius Capital Partners, which launches this summer. "I liked the idea of trying something different," the octogenarian said.
Mobius will continue investing in emerging and frontier markets. Initially, Mobius Capital Partners will manage institutional monies and a cross-border, Luxembourg-domiciled mutual fund. Although a launch date has not been determined, the firm also plans on launching a U.S.-domiciled '40 Act fund in the future.
In 1973, Mobius published a book, Trading with China. A few years later he visited the country for the first time. And today he sees opportunities in private equity, listed securities and fixed income.
Mobius has personal investments in a private equity fund, which takes small- and mid-size mainland Chinese companies public in Hong Kong. Fintech is a focus area, as is firms that assist traditional corporations to better deploy internet technologies. "That's where the growth opportunities are," he said.
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Mobius Capital Partners will manage environmental, social and governance strategies. He said strong governance is central to investing successfully. "There are incredible reforms taking place in China to improve corporate governance," he said. He likes the aluminum industry, which is consolidating, and favors China's large, liquid, state-owned enterprises.
Risks and opportunitiesÂ
Although acknowledging potential leverage risks, he said banks have room for growth and improved efficiency. In 2012, China commenced an anticorruption campaign and last year alone saw 527,000 people punished. "This will be good for these banks, because they're going to have to reform and investors should do fairly well," he said.
Government policy is an investment risk, negative or positive, in any country. It's particularly so in China, given the influence of state-owned corporations, Mobius said. During the legislative meetings, the China Banking Regulatory Commission lowered the required bad-loan coverage ratio, rallying bank stock prices. This measure is also expected to raise transparency around asset quality.
Transparency is particularly lacking with fixed-income securities. Mobius didn't invest in bonds at Franklin Templeton but will do so at Mobius Capital Partners. He said there are excellent opportunities in domestic corporate bonds, an area he also called treacherous. "In China there are still a lot of opaque areas that we have to be very careful with," he said.
Environmentally, China introduced measures last year to reduce coal dependence. Between 2017 and 2020, China will invest $320 billion into renewable energy. Last week Reuters reported that China is creating a new energy ministry in order to centralize policymaking and improve efficiency. During a three-hour speech last year at the 19th National Congress of the Communist Party of China, Xi Jinping mentioned the word "environment" 89 times and "economy" just 70 times, according to Bloomberg Intelligence research.
Outside of China, the country's economic linkages continue to propagate. In 2017, China exported $506 billion worth of goods to the United States. Although a U.S.-China trade war is possible, Mobius thinks the risk is overdone. He said President Donald Trump's trade policies, such as the recent steel and aluminum tariffs, are negotiating tactics. He also believes the Chinese will react pragmatically.
The Middle Kingdom is also driving the Belt and Road initiative, which links 69 countries and is expected to reach $1 trillion in scale. Mobius said investors can participate in various ways, including via construction equipment companies, which should see demand from increased road, rail, port and bridge development.
With China going out and the U.S. dollar weakening, Mobius expects the renminbi to strengthen. "There's no question that China wants to have its currency as a global reserve currency," he said. Consequently, he said, "They have to open up. They have to loosen up their exchange controls."
Other value playsÂ
Beyond China, Mobius is bullish on private equity in Vietnam and listed securities in Brazil, Argentina and Chile. He did recommend caution, however. He said a prolonged period of low interest rates has led to stretched equity valuations globally.
Asia first enchanted Mobius in 1960, after he saw a campus flyer advertising study abroad opportunities in Japan. He subsequently lived and invested all around the region.
He says more foreigners are investing there today, including China. "China is now a huge market, and it's growing because we are now getting more and more access," he said.
Last summer MSCI announced that it would gradually add 222 Chinese securities to its emerging markets index. Thus, index investors are allocating capital there by default. Today, China accounts for one-third of the index, more than double what it did just four years ago. Additionally, two-thirds of China-focused hedge funds saw net inflows last year.
Mobius advises foreigners to travel around China, not just tier-1 cities. "Go to the small cities and see what's happening. Try to get to know the people. At the end of the day, it's all about people," he said. It's important to see companies, meet management teams and understand their backgrounds. "Otherwise, you can get into real problems," he said.
At the parliamentary meetings, Premier Li Keqiang said China's 2018 economic growth target is 6.5 percent, which is expected to exceed many other markets and could further entice foreign investors.
— Joshua Bateman, special to CNBC.com, is based in Greater China. He can be reached @joshdbateman.
