2014 crucial for emerging markets, may set trend for decade

Updated: Dec 20 2013, 17:19pm hrs
We believe 2014 could be an important year for many emerging markets, establishing trends that may play out through much of the remaining part of the decade. In particular, Chinese government initiatives announced in late 2013 could have far-reaching significance. Some 60 proposals across a gamut of issues could have dramatic consequences in areas including health care and social security, justice and the rule of law, intellectual and physical property rights, banking and monetary policy, and environmental protection.

The proposed changes, intended to facilitate sustainable economic growth in China, could also create substantial opportunities for investors. Reforms to state-owned enterprises, aimed at improving their professionalism and efficiency in resource usage, could benefit their listed subsidiaries. Measures aimed at encouraging enterprise and innovation, as well as blocking unfair competition, could speed up the process of rebalancing the economy away from investment-led growth and toward a more entrepreneurial, consumer-focused and service-oriented model. The project has a decade-long timescale, but we nevertheless expect to see some progress in 2014, perhaps through initiatives in free trade zones such as the one announced for Shanghai in late 2013 and others hinted at in the proposals. Of course, there are likely to be casualties as a result of these reforms. Companies facing intense competition and now deprived of the level of government support obtained in the past could be negatively impacted. We, therefore, need to keep our eyes open to avoid such situations.

A number of major emerging markets will see major elections in 2014 Indonesia, South Africa, Thailand and India in the first six months of the year, and Turkey, Brazil and Nigeria later on. As the electoral cycle peaks, we believe administrations may feel more able to address barriers to long-term growth and retreat from populist measures. In these circumstances, ongoing strengths, in terms of solid economic growth potential, strong public and consumer finances, rich natural resources, and favorable demographic trends that have helped emerging markets over the past several years, could gain new traction.

We believe many emerging markets, in addition to China, possess considerable economic growth potential. For example, Southeast Asia has been seeing a notable extension of growth and wealth away from traditional economic hubs, with previously underdeveloped regions starting to see significant catch-up growth. Thailand is most notable in this regard, as the reforms instituted by former prime minister Thaksin Shinawatra have resulted in more money going to the countryside and areas outside Bangkok.

Russia has continued to see gradual reform as authorities seek foreign investment. Nevertheless, investors have been wary and thus Russian equity valuations at year-end were exceptionally low, in our view. Some South African consumer companies have been starting to enjoy solid growth, both domestically and in ventures elsewhere on the continent. Among frontier markets, Kenya is home to a groundbreaking mobile money transfer system that is spreading to other countries and likely will have implications for emerging markets globally.

Microfinance initiatives in Bangladesh are justly famous, in our view, and being duplicated in other parts of the emerging-markets world. In Egypt, we have continued to find companies thriving. We thus have continued interest there even though the news headlines may sometimes be alarming. Central and South America also continue to provide appealing long-term investment opportunities across a range of sectors. We believe that smaller companies in many markets could represent a particularly rich source of investment prospects. As is often the case, adverse short-term news flow in emerging markets typically creates attractive investment opportunities, in our opinion.

As long-term fundamental investors, we do not make short-term predictions for share prices, but we believe longer-term developments that look likely to gain traction in 2014 could drive solid growth potential in emerging economies for years into the future.

Mark Mobius

The author is executive chairman at Templeton Emerging Markets Group, Franklin Templeton Investments