Volatility may create investment opportunities but also spooks investors, causing them to crystalize losses, says veteran emerging-markets manager Mark Mobius.
Market volatility is worse now than it has been in the past, thanks to monetary policies of quantitative easing, says Mobius, whose mandates include Templeton Emerging Markets. The Franklin Templeton manager was speaking at the Morningstar Investment Conference in London when he decried the huge volume of cash that has flooded global markets from money printing in the U.S., UK, Japan and now the Eurozone.
"In the last 11 years there have been three instances of market underperformance but right now we're on the up," he said. "What threatens investors' returns is volatility. We like volatility as fund managers because it creates buying opportunities but our clients don't. Unfortunately the volatility index shows that market fluctuations are happening more often due to central-bank policy. Investors will have to accept that there will be these bumps in the road."
Alongside volatility -- and investors' lack of appetite for it -- Mobius says derivatives pose the greatest threat to markets in the current world. "The biggest threat we face are derivatives. There are US$691 trillion in derivatives globally -- but the global economic output is only US$77 trillion. This seems an extremely high number."
Derivatives are instruments that professional investors use to try and boost returns. They are a contract between two or more parties on whether an underlying asset will rise or fall in value. The underlying asset could be a stock, bond, index, commodity or even interest rate. They are often used to "hedge" a particular asset in an investor's portfolio, so if a fund manager owns a stock he may also take out a derivative contract betting that the stock will fall in value, so that in each instance he can benefit.
Of the new companies floated on stock markets globally every year, 33% of them make their initial public offering in emerging economies. Mobius says that of these emerging-market companies, about 30% are suitable for investment. Liquidity issues rather than corporate governance concerns restrict him from taking a stake in the rest.
The high number of new companies entering the emerging-market universe, says Mobius, should act as a guide for what proportion of your portfolio should be invested in the sector.
Mobius says Africa offers investors the greatest opportunities in the current market environment, adding that eight out of the top 10 fastest growing economies last year were African. He cited supportive fundamentals such as young populations, natural-resources reserves and technology savvy.
"So much of Africa's resources are untapped -- both commodity resources and human resources," Mobius said. "I think that Africa will soon emerge as the manufacturing hub of the globe."
