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Aug. 6, 2022, 10:08 a.m. EDT

Why Mark Mobius thinks U.S. stocks haven’t bottomed — and where he sees emerging-market opportunities

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By Joseph Adinolfi

U.S. markets have provided plenty of excitement this year to keep investors on their toes. But as badly as U.S. and European stocks have performed since the start of the 2022, emerging-market equities have done worse.

But as the U.S. dollar as retreated from its multi-decade highs over the past month, investors, including Allianz’s Mohammad El-Erian have pointed out that valuations in emerging markets have reached “historically cheap” levels.

Asked about his outlook for emerging- markets, Mark Mobius, a pioneering investor who helped to build Franklin Templeton’s emerging markets business before launching Mobius Capital Partners, argued that while the overall tone has been “generally negative” this year, there are still plenty of opportunities to be found in the emerging-markets space.

‘We are finding good companies in all regions’

To be sure, the underperformance of EM stocks is nothing new.

The MSCI Emerging-Market Index /zigman2/quotes/210598082/delayed XX:891800 -1.80% , a gauge that includes shares of companies from more than 20 of the world’s biggest markets in Asia, Latin America and Africa, is down 18.4% compared with the S&P 500’s 13.4% /zigman2/quotes/210599714/realtime SPX -2.45% year-to-date. Over the last 10 years, MSCI’s EM index has returned just 36.9% in U.S. dollar terms, while the S&P 500 has returned 264.5%, according to FactSet data.

Within the index, performance has varied widely, and past performance doesn’t dictate future returns. When asked about his outlook for each region, Mobius said it would be “impossible to generalize” but that he sees “opportunities” for investment around the world.

See: Why the U.S. stock rally is starting to a look like a new bull market, according to these analysts

“We are finding good companies in all regions,” Mobius said during an email exchange with MarketWatch.

When it comes to individual countries, Mobius said he favors India among the biggest EM players, and sees opportunities in Kenya and South Africa among smaller emerging and frontier markets.

Any investor looking to invest in the EM space should keep a few important prerequisites in mind.

“The key is the foreign exchange situation and the country’s ability to pay it debts and our ability to get [U.S. dollars] out of the country when we want to liquidate holdings,” Mobius said.

At the company level, Mobius looks for firms with strong pricing power and “little to no debt”.

Since the start of the year, the financial crisis in Sri Lanka has stoked fears that other frontier markets might experience something similar as the strong dollar and high commodity prices weigh on the finances of countries that largely import commodities like oil.

See: Stock-market rally is ‘fragile’ after investors hoped earnings ‘Band-Aid would get ripped off,’ says RBC

While there are a few exceptions — the currencies of energy producers Mexico /zigman2/quotes/210561814/realtime/sampled USDMXN +0.4742% and Brazil /zigman2/quotes/210561973/realtime/sampled USDBRL +0.8334% have held up remarkably well — the dollar has risen more than 6% against both the Indian rupee /zigman2/quotes/210562010/realtime/sampled USDINR +0.4472% and Chinese yuan /zigman2/quotes/210561991/realtime/sampled USDCNY -0.8388% .

Investing in emerging-market equities likely means investing in Asia, which is home to by far the largest share of publicly-traded companies represented in the MSCI index.

XX : MSCI Global
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US : Tullett Prebon
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