A key component of the Templeton Emerging Markets Team’s investment process is peer review and evaluation. We held our semi-annual group conference last week in Cebu, Philippines. Aside from our weekly review meetings over the phone, this is one of the two times a year when the entire Templeton Emerging Markets investment research team gathers together in the same place to discuss portfolio-related themes, and to assess and evaluate our resources and internal efficiencies. As mentioned, peer review and evaluation is one of the main things we focus during our global gathering.
I’ve asked two of our most experienced and long standing portfolio managers to contribute their thoughts for the next two blogs. Dennis Lim and Tom Wu are both pioneers with the group and started our two largest research offices in Singapore and Hong Kong, respectively.
We are having our global analyst conference this week where members of our portfolio management and research team gather together to discuss emerging trends and challenges.
As many companies now begin their new financial year, I would like to make a case on why improving corporate governance should be at the top of every company’s agenda. One of my readers, James from the UK, recently asked whether corporate governance and transparency is becoming less of an issue, given that he had seen improving standards in emerging markets. I think corporate governance should always be at the top of investors’ minds when they invest in any company, be it in emerging or developed markets. Assuming otherwise might cause an investor to be blindsided, as seen in former U.S. and European corporate scandals.
I had a busy start to the New Year, catching up with several clients and investors around the world. We discussed some interesting topics that I’d like to share with you here.
Emerging Markets Valuations
Many investors are now concerned about the ‘high’ price/earnings (P/E) ratios in emerging markets given the rally last year. I agree that the P/Es have risen but I think that they have done so from a very low base. We have seen market increases of 80-100% or more from the bottom in many of these markets, but I still don’t think valuations are excessive. Over the years, we have discovered that one of the best single indicators of value is the price-to-book value (P/BV). If you look at average valuations over the last ten years, you will see that the low point was about one time P/BV and at the high was about three times P/BV. We are now about two times P/BV. So in terms of the historical valuations, we appear to be in the middle of the range – not excessive, but not as cheap as we were before. Hence, we are a bit cautious on valuations in some regions like Greater China as well as in general for the emerging market universe.
This is my first blog in 2010. As we welcome the New Year during this festive period, it is also a time for reflection…
2009 was an amazing year in the way that emerging markets rose like a phoenix from the ashes. Emerging markets surged in 2009 as a result of many factors, perhaps most significantly the rapid increase in money supply due to global stimulus packages. Solid economic growth, high foreign reserves, low debt-to-GDP ratios, stronger domestic currencies, a rebound in commodity prices, low inflation, low interest rates and investors’ desire for higher gains also supported strong asset flows. In the first 11 months of 2009, emerging markets recorded nearly US$75 billion in net inflows, nearly 40% more than the record-high US$54 billion of net inflows in 2007.