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Mark Mobius' Outlook

Written By Brian Hicks

Posted July 20, 2009

When Mark Mobius gives the thumbs-up, we take notice.

Same goes for his thumbs-down. Last week, the legendary Templeton emerging markets fund manager gave both signals.

Today, we’ll pinpoint your best profit plays on Mobius’s outlook.

First off, you should know Mark Mobius isn’t a pushover by any stretch of the imagination. He cuts a striking figure in the financial world with his razor-bald head and slight smile. When he appears opposite the flapping jaws on CNBC and other networks, he holds the demeanor of a monk even as other panelists yammer on and on.

He’s traveled to nearly all the countries in the world over dozens of years in the investment business. He manages $25 billion in assets at the same Asia-based post he created for Templeton in 1987. He doesn’t need to ingratiate himself to anyone, and he doesn’t take any jive.

So, his first point in an interview last week with Bloomberg was a no-nonsense look at the current trajectory of the world economy.

In short, Mobius sees disaster ahead. . .

Mobius: A "Very Bad" Crisis in Derivatives

Mobius says power players working on behalf of investment banks and other money movers will make sure real reform doesn’t touch our global financial system’s darkest corners.

In Washington and Wall Street especially, lobbyists and hob-nobbers are busy beavers these days. They’re working to ensure the $592 trillion-dollar international derivatives market (10 times the GDP of all the countries in the world combined) continues to generate staggering amounts of wealth by remaining unregulated.

By 2015, Mark Mobius thinks we could be looking at a severe crisis driven by trillions of government stimulus dollars that add to the global churn of derivatives like credit-default swaps (CDSs). "Banks make so much money with these things that they don’t want transparency because the spreads are so generous when there’s no transparency."

Though Congress, the Department of Justice, and the President are all pushing for more efficiency through information requirements and regulation, this Wild West-style capitalism is simply too lucrative for connected cronies to it let pass into history.

As astronomical derivative bets continue to set the direction of global economic shifts that affect you and me, Mobius expects a series of corrections that could take 20% off the top of each recovery rally before you can say, "Bull market."

But in all that volatility driven by derivative-crazed banks in New York and London, there is a lesson for long-term investors.

Emerging Market Stocks "Aren’t Expensive"

Banks in India and China don’t need to play the same games that lending houses in developed countries do — millions of new banking customers are coming in to open accounts every year. American Depositary Receipts of global financial stocks like Indian bank ICICI (NYSE:IBN) give us an easy way to tap intrinsic momentum on the other side of the world.

Mobius has been openly bullish on ICICI (which stands for Industrial Credit and Investment Corporation of India) in the past, and he alluded to it again in the Bloomberg interview.

ICICI shares gained around 27% in the week from July 14 to July 20, including a bounce of more than 8% as of mid-day Monday.

In the bigger picture, IBN and its U.S.-listed Indian peers added $9 billion to Indian ADR capitalization in the week through July 17.

Did those returns accompany a western market rally? Yep, but long-term returns on smart emerging market stock buys are off the charts.

Even with deeper troughs during downturns — from mid-October 2008 through mid-January of this year, the chart below shows that IBN dipped twice as much as the Dow — investors in that one Indian bank are up nearly 177% since 2004, compared to negative 14% for U.S. blue chips. Right here, you can see how double downside quickly gave way to a supercharged recovery.

ICICI Share Chart vs. Dow

If you can’t stomach five years of swings, how about six months? IBN still spanked the Dow in the past half-year, 125% to 10%.

Now, I wrote recently about how BRIC (the Goldman Sachs-coined acronym for Brazil, Russia, India, and China) is a sloppy catch-all and a dangerously glib way to lump together four very different emerging economies.

Yet, ICICI is exactly the kind of company that shows how precise ADR investing can bring humongous profits to those who look closely.

Mark Mobius said his favorite emerging market stocks weren’t expensive last week, and even though we’ve seen a breakneck rally since then, the long-term case is intact.

IBN is trading just above $33 per share right now, but we like it closer to $26 from a technical standpoint and because a pullback is about due.

News reports from India are also starting to foreshadow a sub-par harvest because of shabby monsoon rainfall and potential droughts. That’s a buying opportunity in the making.


Sam Hopkins
Sam Hopkins

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