Most investors have refrained from investing in frontier markets because of the perceived risks. However, I do not believe that the level of risk is necessarily higher as compared to emerging markets. Frontier markets generally share the same political and economic issues as emerging markets, but their valuations may be more attractive as a result of this perception. At the end of the day, it all boils down to picking the right company or stock.
I was in Mongolia a while back looking at potential opportunities in this frontier market. We flew in at midnight to Ulan Bator, the capital of Mongolia and home to 38% of the country’s three million population. Arriving at the Ulan Bator airport was like arriving at an airport in Siberia. The Russian influence was clearly evident, not only by the Cyrillic lettering on signs but also by the somewhat undeveloped facilities. Airport guard uniforms were very Soviet-like with those extra wide brim hats that could have been designed to double as umbrellas.
Hong Kong, 1969 — the year I started my first company. It was a consulting firm helping Western companies that were venturing to Asia. Who would have thought that almost 20 years later, I would receive a call from Sir John Templeton to help him start a dedicated emerging markets portfolio management team. That’s how Hong Kong, one of the greatest cities in the world, became the first Templeton office outside of U.S.
We were the pioneers in this field. There have been incredible changes in emerging markets since we started in 1987. The term “emerging markets” was only coined in the late 80s by the International Finance Corp, a unit of the World Bank. Prior to that, they were all derogatory like “under-developed” or “third world”, which never really fully described all the opportunities that were bubbling in those markets.
Just take a look at Singapore, it broke away from its British colonial master in 1963, became an independent republic in 1965 and within a span of 40 years, achieved “developed market” status, as defined by MSCI. I recently met up with the founding father of modern Singapore and its current minister mentor, Lee Kuan Yew, and we discussed the changes that we had seen in the region and globally.
In the early years, the number of countries in which we could invest in was only 5. Today, it’s over 40. The number of companies has also dramatically increased by over 20-fold and of course, the market capitalization of those companies and countries has increased dramatically. It was, however, a difficult time. In those days, although there were many emerging market countries in Asia, Africa, Latin America and Europe, very few of them were open or large enough for investment.
There were strict foreign exchange controls and limitations on foreign investment, in addition to the plethora of problems of safekeeping of securities and market liquidity. We had to spend time setting up the basic infrastructure for operations and trading, which were mainly non-existent in those markets. Nowadays, foreign investors can easily invest in whatever stock they want and it’s all taken for granted.
Thank you for returning to read my blog. This time, instead of hearing from me, you will be reading the thoughts of a member of the Templeton Emerging Markets team – Sven Richter is a portfolio manager and has been with the team for almost 15 years. He is based in Johannesburg, South Africa, and I asked him to write on my behalf this week. Sven represented our team at a client conference hosted by Franklin Templeton Investments in Vienna last week to discuss global investment themes and trends, and here are his observations from the trip:
By Sven in Vienna
I have been to Vienna about half a dozen times, and I was also lucky enough to live here for a period. The weather for the event was rainy, which was a pity for many of our clients who had never seen the beautiful city of Vienna, but what impressed me most was the high level of interaction from the clients at the event. They were very knowledgeable and asked many interesting and thought-provoking questions.
I was on a panel discussion on opportunities in the emerging markets equity and fixed income space. With my colleagues from the Franklin Templeton Fixed Income Group, we identified two main themes. We are still finding opportunities to invest and still see attractive upsides for the stocks that we select.
Firstly — in our view, the opportunity for finding stocks and fixed income investments today has moved to a stock-specific and bond-specific level. Markets are not cheap as a whole compared to where they were a year ago, but we are still finding opportunities to invest. We have to use our research and knowledge to find the right investment.
We officially opened our Malaysian office in Kuala Lumpur this year, our 15th emerging markets research office around the world. We have been expanding our research team pretty vigorously for the last three years — we opened an office in Ho Chi Minh, Vietnam, in 2008 and in Dubai, UAE, in 2007, and more may follow.
The first Templeton Emerging Markets office was set up in Hong Kong in 1987. I’m proud to say that Allan Lam and Tom Wu, pioneers from our Hong Kong start-up years, are still with the group today. Dennis Lim, who helped to start the Singapore office in 1990, our second EM research base, and many other local pioneers still remain an essential part of the portfolio management and investment team, which has now grown to 39 professionals. I believe that it is very important to have the right talent in place and in keeping that talent. Most of our portfolio managers have been with us on average for 17 years while the average tenure for the entire Emerging Markets team is 8 years.
It is important to have local portfolio managers who know the ground and speak the language. We have members from 26 different nationalities, speaking over 20 languages, it’s like a mini United Nations. The local guys sitting in the emerging market offices have a different perspective and worldview from a person sitting in U.S. or Europe.