Insights from EM Analyst Conference Part II
By Tom Wu, Senior Managing Director, Templeton Asset Management, in Cebu, Philippines
Following my colleague’s post on the BRIC economies a couple of weeks ago, it’s worth noting that our global emerging markets strategy includes investments in over 20 emerging economies. As bottom-up investors who look at companies on a stock-by-stock basis, there are opportunities and bargains in many of these markets which might not appear on most investors’ radars.
During the Templeton emerging market team’s conference in Cebu last month, we discussed a number of these opportunities. Today, I’ll focus on two countries – Turkey and Hungary, which we believe are trading at attractive price-to-earnings and price-to-book ratios.
Similar to other emerging markets, Turkey has benefited from low interest rates and low inflation. Although the global economic downturn has impacted Turkey’s GDP growth rate significantly since a robust 9% in 2004, we do expect its economy to expand at 2% for 2010. One reason for the return of investor confidence has been the nation’s building of its foreign exchange reserves, which now stands around $70 billon, based on a combination of export growth and foreign investment flows. We have been invested in banks and petroleum retailers in Turkey, in line with our “Consumers” and “Commodities” investment themes as mentioned by Dennis earlier.
Hungary is another interesting market for us. Negatively in the headlines several years ago, the Hungarian market has been one of the top performers in Eastern Europe with the MSCI Hungary Index returning 78% in USD terms during 2009. Despite its strong performance, we believe that the Hungarian market remains attractively valued with telling signs of a slow recovery, supported by higher exports to Western Europe and a positive current account balance.
The current government has been able to stabilize state finances under the International Monetary Fund (IMF) program and as a result of drastic spending cuts, is likely on track to meet IMF guidelines. With the next parliamentary elections in Q2 this year, possibly leading to a change in new government, we could see renewed discussion about potential adoption of Euro and European Exchange Rate Mechanism (ERM) entry in 2012. This could further reduce the country risk. As such, we remain positive about the country’s long-term prospects.
It is important to note that while investing in emerging markets may offer higher returns, aligned with these returns are more risks such as greater volatility, currency fluctuations, less liquidity and differing legal standards. In view of those risks, our team’s investment approach is to adhere to the Templeton principles of value investing and fundamental research, seeking the best long-term investment bargains in emerging markets. In general, we look to buy and hold an investment for an average of 5 years and we do not let short term market noise distract us, in fact those periods of extreme market volatility often provide the best buying opportunities. In addition, we diversify across markets, industries and companies to minimize risks in our portfolios. It is also our experience gleaned from years of investing in those markets that has taught us how to evaluate every situation for potential short-term and long-term impact. It is important to understand whether an issue is just a short-term blip or has the potential for longer-term repercussions.
My most memorable experience at the Cebu conference was the “Awards Dinner” in which Mark presented certificates of appreciation and gifts to all the team members who have worked with the group for 10 years or more. Most of the portfolio managers have been with the company for an average of 18 years while the entire investment and research team has an average tenure of 9 years, so there were quite a number of us who received the loyal service award that night.
 Source: IMF WEO, as of Oct 2009.