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Mobius cites India as EM concern

November’s surprise ban of large currency bills in India is one of the greatest single-country risks in emerging markets, Mark Mobius, executive chairman of the Templeton emerging markets group, told FSA.

In early November 2016, prime minister Narendra Modi announced that the current version of the 500 and 1,000 rupee bills, worth about $7 and $15 respectively, would be banned, effectively removing 80% of the currency in circulation.

The move is meant to stop the flow of counterfeit bills, bring billions of dollars worth of unaccounted wealth into the mainstream and fight corruption. But Mobius said it came at a cost to India.

“People have to change their bills for new ones by the end of the year and this is a big drag on commerce,” Mobius said in an interview with FSA. “This will result in a decline of GDP growth.”

Other emerging markets in Asia face different challenges in 2017. Mobius said there were concerns about the lack of depth of the financial system in China while neighbouring Taiwan and Korea, which are both heavily dependent on exports, could take a hit from a shift in US foreign policy.

During his 18 months on the campaign trail, Trump had promised to tear up trade agreements, slap tariffs on imported goods and bring jobs back to the US. If Trump sticks to his election promise and adopts a more protectionist approach, this impact will be felt across Asia where many emerging markets have grown on the back of exports.

Given this context, the Templeton emerging markets group has been investing in domestically-orinted companies such as those in the consumer goods sector that produce food and beverages, consumer durables and technology.

“We have been focusing a lot on the domestic markets in those countries – that is where the growth will be” Mobius said, adding that those companies were less vulnerable to external factors.

Rate hike hype

In 2017, Mobius foresees countries like Brazil and Russia, which have been plagued by political and economic problems, making a comeback. In Asia, Vietnam is attractive.

“There will be more great opportunities [in Vietnam], not just because it is growing at a fast rate but because the entrepreneurial spirit is strong,” Mobius said, adding that the firm is also looking at African countries such as the Ivory Coast, Kenya and Nigeria.

EM investors are becoming increasingly nervous about US interest rate hikes in 2017, a rising dollar and the protectionist rhetoric of president-elect Trump, which has already resulted in outflows.

Mobius, who spent late 2016 in the Philippines on a research trip, said investors are over-concerned about US interest rates.

“There is a concern about a strong US dollar drawing money away from emerging markets into the US – but on the flipside of that, weaker emerging market currencies mean that these countries can export more and their economies can grow on exports,” Mobius said. “I tell them not to be so focused on US rates.”

Interest rates, not only in the US but also in Europe and elsewhere in developed markets, remain one of the main considerations for investors in EM fixed income. However, Mobius said these should be less of a concern to those investing in EM equities.

Part of the Mark Allen Group.