Veteran investor Mobius is bullish on Brazil
March 27, 2019
The time is ripe for emerging markets and Brazil is among the most appealing, says Mobius
The capital markets in Latin American have been rocked by a revolution in recent years, says Mark Mobius. It has little to do with rotating governments or volatile economies. Rather, it’s the byproduct of the digital revolution where the internet, smartphones and ever faster PCs are steadily streaming information.
And it’s coursing through almost every corner of the marketplace, he says, touching companies, regulators and investors, while creating a degree of transparency never seen before. The veteran emerging market investor cites the fallout from the Operation Car Wash probe as an example of its influence. The scandal, where bribes were shuttled among Petrobras executives, construction companies and politicians, focused attention on corruption and corporate governance throughout the region.
“This could have never reached the proportion it did without the internet and the fast communications it allowed,” says Mobius. “People can find out what’s going on in Brazil, Colombia, Venezuela. We get instant feedback on everything that’s happening.” This is also part of a broader trend that upended governments in Latin America in recent elections, says Mobius, who retired from Franklin Templeton early last year and now manages his own emerging market fund. “Political temperatures are rising because people are becoming aware of what’s not working in government and why. And they’re demanding faster action,” he says.
The digital revolution is just one factor that explains why Mobius is upbeat about Latin America and emerging markets in general. He says another big reason is investor wariness about the US. If the economy slows and the bull market winds down after an almost unprecedented run, he says investors “are going to diversify into global markets.” Also clouding the outlook for US equites is political uncertainty surrounding President Donald Trump. “Impeachment won’t be good for business or the markets because the Democrats could reverse the tax cuts and other pro-business policies,” according to Mobius.
Mobius takes issue with some of the bearish sentiment currently surrounding Latin American markets. He dismisses the negative impact of the recent interest rate increases by the US Federal Reserve as “already discounted” in the marketplace and believes the brewing US-China trade war could ultimately help Latin American economies. “At the end of the day, US demand for goods and services isn’t going to decline. The Chinese are smart enough to reach some agreement,” he says. “In the meantime, importers and manufacturers are going to realize that depending on China isn’t a very good strategy. They’ll diversify their sources.”
He also discounts the importance of the downturn in commodity prices that have hit Latin American economies. “Prices will move up longer term,” he says, “In dollar terms, imports may have gone down, but China continues to import tremendous amounts of raw materials. The demand will be there for a long time.”
Although Latin American markets offer fewer opportunities then the deeper, more liquid markets in Asia, Mobius ranks Brazil along with India at the top of his list of most appealing countries.
The election of Jair Bolsonaro and his pledge to ease regulations, fight corruption and crack down on crime are all positive for the market, he says. “If he can bring all that to the table, it would be a big shot in the arm for the economy” and attract new investors. “We’re not just talking about foreign investment. We’re talking about domestic investment as well,” according to Mobius. Longer term, he believes Brazil could match the growth of China and India in the next 5 to 10 years.
In Mexico, Mobius acknowledges that President Andrés Manuel López Obrador isn’t viewed favorably by the business community, especially after he cancelled the Mexico City airport project. But he believes the sentiment is overdone. “He realizes if he wants to achieve what he set out to achieve, he needs the support of business,” he says. “It’s not as bad as people think.” What’s more, Mexican manufacturers could be the biggest beneficiaries of a US-China trade war as US companies seek other places to produce their goods, according to Mobius.
Looking ahead, Mobius says Latin American governments should do more to privatize state-owned companies. He also believes they should offer some tax incentives to persuade more companies to go public. “When a company gets listed, they become more transparent,” he notes.
A concern that too few nations in the region understood the lessons learned from Argentina’s economic collapse worries Mobius. During the Asia crisis of 1990s, he points out that almost every nation in the region was affected by the crisis and responded with fiscal reforms. Though bullish about Mexico and Colombia, he wonders if they’ll practice fiscal restraint in the future. For Mobius, the lesson from Argentina was clear: “Don’t go overboard with spending.”