He was in Dubai last week on a brief stopover in his global wanderings, to check progress on the apartment he owns in the Address Downtown Dubai that was damaged by fire last year, among other things. The Middle East, it turns out, is very much on his mind these days, and Saudi Arabia in particular.
As executive chairman of the Templeton Emerging Markets Group — part of the $750 billion Franklin Templeton Investments giant — his job is to scour the fast growth areas of the world for potential investment prospects. Mobius likes what he sees in the Arabian Gulf.
“At the moment, out of $500 million we have invested in the Middle East, some $270 million is in Saudi Arabia. But there is $29 billion of assets in the emerging markets group. We could easily double the investment in Saudi equities. If the reforms in Saudi move ahead, we could easily absorb another $200 million to $300 million in Saudi Arabia,” he said.
High up his list of priorities is Saudi Aramco, the national oil company that is considering various options to go public on stock markets, including a global initial public offering (IPO) on one of the big stock exchanges, maybe in partnership with a big foreign investment institution from one of the fast-growth markets in which Mobius is expert.
“On Aramco, I think it would be better to wait until Saudi Arabia gets into the MSCI index,” he said, referring to the possible inclusion of the Kingdom’s stock market in the emerging market sector of the global indices. Such a move is forecast to increase Saudi Arabia’s investment visibility and attract more foreign funds, like his.
But Mobius said there would remain concerns about what he called “ESG” — the environmental, social and governance criteria that are increasingly important as investment factors.
“There are corporate governance issues that would leave a big question mark. The Saudi government is obviously running the show and will have to make it clear that the quoted element of Aramco is independent of the government. The way to do that is to have truly independent directors and ensure that they and the shareholders will get a chance to vote on key issues,” he said.
There were other issues regarding Aramco, he said. “It would also be good to spin off those things like schools, hospitals and social projects that are not strictly part of the oil business,” he said, although he conceded that financial considerations would go a long way to easing investors’ concerns on these matters.
“The dividend policy will also be important in determining investor attitude. A good dividend might help overcome corporate governance concerns. People will forgive transgressions if there is a big dividend in prospect,” he said, and he urged the Saudi authorities to take their time in addressing these matters.
“I think any delay in the IPO is because they are still trying to confront these issues. The investment bankers want the fees, but we the investors get to ask the important questions,” he added.
At the moment, Mobius is invested in Saudi sectors such as food, banking and logistics, but does not rule out extending to other sectors as long as they meet Templeton’s basic requirement of delivering “dynamic growth potential in the world’s fastest growing economies.”
But, he added, “inclusion in the indices is crucial.” The vast majority of global investment flows are via exchange traded funds (ETFs) which follow recognized indices like the MSCI.
There has been a debate on the international investment scene on whether the emerging markets (EM) are still the best investment options, given improving growth in developed markets like the US and Europe. But Mobius has no doubt.
“Emerging markets are still attractive. There was a long period of underperformance against US markets, but this ended in 2016 so we’ve had nearly two years of (EM) bull markets. These bull markets tend to run for between five and six years, so there is still some way to go. EMs are still more favorable than US markets, and if you take out the EM elements of American markets — like Alibaba — the comparative performance is even better,” he said.
When Mobius first got into the emerging markets business in 1987, it was a very different world. “Back then it was imagined as a low-income investment category, like Greece and Portugal for example. Then these countries began to improve their investibility, by making their forex and stock markets more efficient.
“Now the phrase ‘emerging’ isn’t really appropriate any more. We have come to conclude that we have to redefine it as a high-growth or potentially high-growth market. South Korea is looking to get into the developed market category,” he added.
The EM universe got a shot in the arm at the turn of the century when the BRICs concept emerged as an investment category, focusing on the growth potential of Brazil, Russia, India and China. (South Africa was added later as a political concession.)
“I think the BRICs was a very sound concept at the time. The idea of grouping together countries that were very different, but which also had some basic economic characteristics in common. It’s still a good investment concept, but maybe they should stick to the four original countries, without South Africa. In general, it’s time to think about the EMs in a new way, to think of them as growth markets rather than emerging markets.”
Mobius then gave a global tour of investment prospects. “Some 20 percent of what we own is in China and by far our biggest fund is the Asia fund. India comes after that and then Thailand. Vietnam is a potential one for EM market status, but at the moment we include it in the frontier markets category. Malaysia is good at the moment too. Japan is in Asia, of course, but we do not regard that as an emerging market. It has already emerged. Africa is very interesting. Ten of the fastest-growing economies in the world are in Africa, from a low base of course,” he said.
Political considerations come into play in the investment world. “We would love to be in Iran, it’s such a big potential market, and in Russia too, but sanctions will not allow. We are in Russia to some degree, but it’s restricted by sanctions. I used to sit on the board of Lukoil and found it a very good company,” he said.
With so much riding on China, it is natural that this is one of his top priorities.
“Where does the Chinese growth story stop? When they get too big of course. Growth has slowed down. In 2010 the economy in China was growing at a rate of 10 percent, in 2017 it’s around 6 percent, but of course it’s much bigger in dollar terms.
“The ‘One Belt, One Road’ program is a policy to help sustain higher growth, but it also has political and military aspects too. I’ve just got back from Sri Lanka, where there is big Chinese investment across all sectors,” he said.
Does he regard the global investment scene as threatened by increasing rivalry between the US and China, which some analysts have forecast will inevitably turn into a military confrontation? “There is already a military angle to the US-China relationship. The situation in North Korea is very interesting, and has clear implications for China. There is a debate going on there between the old timers who want to carry on supporting North Korea, and the others who are worried that conflict there would bring the US into Asia in a big way,” he said.
“The forthcoming 18th Communist Party congress in China will be very interesting, and I think President Xi Jinping will do something very profound there,” he added.
Exactly what he thinks that will be, he is not inclined to say, but instead he maps out a reading list that he believes will explain the modern world and the US-China rivalry. The titles are not reassuring for world peace: “Treasury’s War,” “My Journey to the Nuclear Brink,” and “The Hundred-Year Marathon.”
The latter title, Mobius explained, was inspired by a comment from the founder of communist China, Mao Zedong. “Mao said in the 1950s that the race against America was a 100-year marathon. Well, we’re more than half way through the race, and China has nearly caught up,” he said.
The Mobius world view is derived from decades of travel and experience of having lived through some of the more turbulent times in global markets. He still rates the Asian financial crisis of 1997 as the most severe he has experienced. “All the big Asian economies seemed to be going down the drain. The big question for investors then, and it remains a central question today, was: Can you get your money out?” he said.
When we met, he had just come from South Africa, and was on his way to Singapore, clocking up a few more miles on a schedule that logs thousands every year. Where does he call home?
“I was born in New York to a German father and Puerto Rican mother, but I gave up US citizenship some years back. Traveling to some places with a US passport was a problem, and of course there was US tax,” he explained.
“I’m a German citizen, though I live in South Africa, Dubai and Singapore. Hong Kong is my tax base, and I have property there too. But Singapore is where I hang my hat,” he said.
Then he went back to books, talking about the two cartoon publications that have been produced about his life and work, before opening a copy of his own 2012 book “Passport to Profits” and inscribing a dedication on the fly page.
One author he will probably not be recommending is the recent Nobel prize winner for economics, Richard Thaler. “I think the economists are behind the curve. He won the prize because he hit on the idea that peoples’ emotions determine how they invest,” said Mobius. “That’s not exactly new, is it? Where have they been?”