Mark Mobius, managing director of Templeton Emerging Markets Group / REUTERS / Cynthia Karam

This is largely due to the importance Templeton attaches to the quality of corporate governance and the treatment of minority shareholders. Russia has failed to achieve success in these areas over the past four years. The purchase of private oil and gas company TNK-BP by state-owned Rosneft, the departure of TNK-BP's top managers, how Igor Sechin, who had previously only worked in the civil service, will manage the company, and the disregard for the interests of minority shareholders of TNK-BP Holding are extremely worrying for Mobius. During the meeting, he asked about this situation almost more than he talked about it himself. "It was obvious to us that the state would increase its share in the oil sector," admitted Mobius. "But we always believed that it would allow TNK-BP to operate, and Rosneft would receive licenses for new fields. But I am afraid that as a result of this deal, they are sacrificing efficiency. This is the danger, and here we need to be careful."

– Recently, a number of Russian companies, such as Megafon , Moscow Exchange or a company from a completely new sector for the Russian market – Mother and Child , have conducted IPOs. Have you participated in any of them?

1983

appointed president of Taiwan's International Investment Trust Company

1987

President of Templeton Emerging Markets Fund (later Templeton Asset Management, now Templeton Emerging Markets Group)

1999

Member of the World Bank Global Forum on Corporate Responsibility

2010

took over as Managing Director of Templeton Emerging Markets Group

Mobius calms down

Commodity prices have been flat or even falling for months now. Oil has been trading sideways since 2011. Mobius explains and predicts: “Commodity markets are very volatile by nature. The reason is very simple: there are real consumers of commodities, and there are speculators. And when commodity stocks increase greatly, prices do not just fall, they fall very much. However, the long-term trend in commodity markets is an upward trend. For example, if you look at the dynamics of the price of gold over the last five years, its latest collapse seems terrible, you might think: “Oh my God, the uptrend is broken, the price is going to fall.” But if you look at 20 years, the recent fluctuations are very small. So in the case of commodities, it is very important to look at the long term, without being distracted by periodic cycles and volatility in individual markets.”

Regalia

With over 40 years of experience in emerging market asset management, Mobius has received numerous awards. In 2011, Bloomberg Markets magazine named him one of the 50 most influential people, International Money Marketing named him Emerging Markets Equity Manager of the Year in 2001, and in 1999, the Carson Group named him one of the 10 most successful managers of the 20th century. In 1998, his fund was ranked first in the Reuters Global Emerging Market Funds survey, and in 1994, Mobius was named CNBC's Manager of the Year.

Templeton Emerging Markets Group

Asset Management. Franklin Resources' emerging markets asset management division manages more than 50 funds. Assets under management (as of September 30, 2012) are $48.2 billion. Franklin Resources is an investment management company (operating as Franklin Templeton Investments). Manages mutual funds, pension funds, and educational funds. Assets under management (as of April 30, 2013) are $847.5 billion.

Corrected version. The original published version can be viewed in the Vedomosti archive (smart version)

During a visit to Russia in 2009, Mark Mobius, one of the world's leading experts on emerging markets, said that if Templeton manages to increase its assets to $50 billion, investments in Russian stocks could grow from $2 billion to $10 billion. True, he said, these are purely theoretical calculations: everything depends on how much money comes into the funds and whether the prices of Russian stocks meet Templeton's goals.

Assets under management by Templeton Asset Management (now Templeton Emerging Markets Group) then amounted to $25 billion, and the markets were just beginning to recover from the 2008 crisis collapse. By the time Mobius met Vedomosti again at the Russia 2013 forum organized by Sberbank, Templeton had almost managed to fulfill the asset target – they had almost reached $50 billion. But the volume of investments in Russia had not changed, Mobius said.

– Emerging markets have been lagging behind developed markets for months, even though they are generally considered to be both falling and rising faster. Why hasn’t the rising tide lifted all boats this time?

– You have to be careful with these comparisons. There have only been two years in the last 10 years when emerging markets underperformed developed markets: in 2008 during the financial crisis and in 2011. Since 2008, it’s been clear: during crises, emerging markets react more strongly, they fall more. But the recovery in 2009 was phenomenal. And in 2010, emerging markets, especially China, had a lot of initial public offerings. The number and size of IPOs more than doubled to over $5 billion. There were too many stocks on the market, and in 2011 they underperformed developed markets. But in 2012, they outperformed them again. Many people just look at the situation over the short term and say, “Oh my God, emerging markets are lagging!” But in the longer term, they are outperforming.

- Why are they lagging behind now? While the S&P 500 index has grown by 12% this year, the Russian RTS has fallen, and the MSCI Emerging Markets has remained almost unchanged.

– It is true that the dynamics of some markets, in particular the BRIC markets – Brazil, Russia, India and China – have not been impressive this year. But there are other emerging markets, such as Thailand, Turkey, and frontier markets, such as Nigeria, which have shown very good growth. And, of course, the frontier markets as a whole have outperformed both the emerging markets and the US market.

The BRIC markets have slowed down for two main reasons. One is that there have been too many IPOs in China, and that effect is continuing, with money from the secondary market going into the primary market. The other reason is that India has suffered from numerous corruption scandals and restrictions that the government has imposed on business. In Brazil, the real has become too strong, and the government has taken measures to extract as much money as possible from resource companies like oil giant Petrobras and mining giant Vale. And in the case of Russia, well, you know the problems of Russia. It’s corporate governance and other issues that scare foreign investors, the political situation, for example. If you look at it through the prism of headlines in the Western media, Russia appears in a very negative light.

– Since the collapse of global markets in 2008, the behavior of investors and traders has been characterized by one principle, called risk-on, risk-off: they either all quickly bought risky assets together, or all quickly sold them together. In recent months, it seems that this behavior has begun to weaken. Do you think so?

- No. Volatility will increase, not decrease. If you look at the last 20 years, it has been increasing in both emerging markets and the US market.

– After the tech bubble began to deflate in 2000, it took the S&P 500 more than seven and a half years to return to its all-time high. And after the worst financial crisis in 80 years, accompanied by a global economic crisis, it took less than five and a half years. Why did this happen and is this growth sustainable?

– It’s sustainable. If you look at the history of the stock market, you’ll see that the bear markets, when the market falls by more than 20%, are very short. They last maybe 12–15 months. And the bull markets last for years. Obviously, we’re in a bull market now, and it’s going to last for some time – until the next crisis. That’s why when people ask us, “When is the best time to invest?” we say, “When you have money.” Because you’re most likely to invest during a bull market. And in a bear market, if you’re following an averaging strategy (investing a certain amount regularly), it’s better to buy.

- When and why will the next crisis happen?

- When - no one knows. Apparently, it will be connected with the world banking and financial system in general.

- Again?

– Yes, because the mistakes of the past have not been fully learned and the causes of the last crisis have not been eliminated. Banks still combine the functions of savings banks, accepting deposits, and investment banks. And they still have huge volumes of derivatives on their balance sheets, which represent a great risk. Probably, the next crisis will be connected with some of these factors, although no one knows what exactly.

– Are asset prices heavily distorted by the stimulus policies of the US Federal Reserve and other central banks?

– In some cases, we can see that excess liquidity from central banks entering the system is starting to push prices up to unreasonable levels. The American and Japanese markets have shown impressive growth, which is evidence of a significant increase in money supply and liquidity. But we are not even close to the level of 2007, where the crisis collapse began. We must remember that corporate profits have also increased since then, and productivity has increased in many areas.

– Do you think that the commodity supercycle generated by the rapid growth of developing countries has not ended?

- No, for two reasons. Look at the demand: there is China with more than 1 billion people, there is India with 1 billion people who are getting richer. There is Russia with a large population, Brazil, many other countries that are also getting richer and that need more and more goods and services. Therefore, the demand for raw materials will not go away. On the other hand, on the supply side, the cost of extracting and processing raw materials is growing. In addition, the governments of many countries have become much more active in protecting their natural resources and are demanding an ever-increasing share of the profits of mining companies. Finally, there are trade unions, the fight for workers' rights, for the environment, which makes the process even more expensive. Therefore, the dynamics of the supply and demand ratio indicate an increase in raw material prices in the long term.

In previous years, due to high prices, mining companies initiated huge multi-billion dollar projects – in Africa, Mongolia, many other countries. Then prices fell, and companies are now forced to write off the cost of these large-scale investments. The managers who started these projects are fired, and the new managers are more conservative, they decide to stop the implementation of these projects. Therefore, in a few years, there will be a new cycle caused by a shortage of raw materials due to the fact that the projects were not completed. Usually, such a cycle lasts five years. That is, in 4-5 years, we can expect a new round of price growth. But, of course, not all raw materials will rise in price at the same time. Some will fall in price, others will rise. In the agricultural sector, prices are largely determined by the weather.

– When we met last time, in 2009, you were considering the possibility of investing in OGK-4 (now –

"E.ON Russia"), you had a stake in RusHydro. How do you assess the Russian electric power sector?

- We never invested in OGK-4. Two things are important to us - regulation and corporate governance. We are wary of any company whose product prices are regulated by the state, especially where it concerns broad sections of the population. And in corporate governance, the attitude towards minority shareholders - like ourselves - is important to us.

– Do you think that the reform of the electric power industry and the liberalization of the sector carried out in the 2000s are now being curtailed?

- Yes, and this is one of the reasons why we have been so cautious about this sector. There are concerns that the government's actions to regulate tariffs will be disadvantageous to shareholders of electric power companies.

– Last year, the Central Depository was created in Russia, and the international settlement systems Clearstream and Euroclear were admitted to the bond market. However, judging by the reports of foreign investment funds, many did not even notice this. How do you assess these changes, will they be able to attract foreign investors to the Russian market?

- We have, of course, noticed them, we welcome them. And I think we did not notice them because many investors were simply not here. When they come to the Russian market, they will see that this is a very important step. The same can be said about the merger of the MICEX and RTS exchanges. We have been waiting for this for quite a long time and are glad that it has finally happened.

- Why? After all, there was competition, and it is better than a monopoly.

- Yes, but competitors often do not have the liquidity that comes with merging them. In addition, the level of transparency in terms of prices increases.

– Where do you conduct transactions with Russian shares?

– In London, New York, and Moscow – depending on where there is liquidity.

– We looked at them, but to be honest, we usually don’t participate in IPOs, but start investing on the secondary market. The IPO price is often very high, the company is sometimes overvalued. We prefer to wait until the trading history is formed, and we can invest later.

– Are there any interesting companies among those entering the market?

- Yes, we like shipping companies, railway companies, consumer sector companies. I would like to see more of them. Then there will be more liquidity, more opportunities - primarily in the consumer sector.

– If you look at your funds’ reports, you haven’t changed your positions on Russian companies much lately, while many other funds have been more active, mostly reducing their investments. Why?

– We try to keep the turnover of our portfolios low – less than 20% per year. This means that the average holding period for a share is five years. This is our hallmark. We don’t jump back and forth because of changes in market sentiment or anything like that. We look at the long term. When we invest, we think about what will happen not next year, but in the next five years.

– What will happen to the Russian stock market in five years?

– If the reforms that are being talked about are implemented, and I am primarily talking about improving corporate governance, Russia could become a very large market, even on par with New York, London, and other financial centers. It is a large country, and there are a ton of opportunities for doing business here. There is no reason why Russia could not become a large market. But a lot will depend on the situation with corporate governance, which, in turn, is connected to the rule of law and other pressing issues for Russia.

The stock market is a miniature world. There are buyers, sellers, a market, disputes, ways to resolve them, a regulatory system. And how a country can organize the fair functioning of this world so that everyone is treated fairly and there is transparency will determine how the market works and how it grows.

– The Russian stock market is largely considered a derivative of the oil market. How do you see the future of the latter?

- Very good. As I said, the long-term trend in the commodity markets is upward, and this is especially true for oil. Because, to take just one example, the number of cars in the world is growing rapidly. China already sells more cars than the United States, which was the largest car market in the world. And each car needs fuel - gasoline, diesel. Yes, we can talk about solar panels, about other new technologies, but in the foreseeable future they will not replace the internal combustion engine. And this means that more and more oil will be needed.

– But thanks to new technologies, its production is increasing and more and more oil is coming to the market.

– But demand is also growing. On the graph showing oil demand in developing and developed countries, the curves are starting to intersect. Currently, global consumption is 80-90 million barrels per day. Saudi Arabia produces about 10 million barrels, Russia – another 10 million. The US, for example, will soon also increase production to 10 million (and don’t forget that they still need to export oil, because they mainly consume it themselves). But this will not have a significant impact on the market, because with such an increase in the number of cars in China and India, demand will absorb this supply.

– Did the story of Rosneft’s takeover of TNK-BP and the latter’s position towards minority investors in TNK-BP Holding influence investors’ attitudes towards Russia?

– Absolutely. They have affected our attitude, and I am sure many investors are closely monitoring the situation. There is serious concern about the fate of minority shareholders in TNK-BP after the purchase of the company by Rosneft, because this is an indicator of how the Russian government will further treat minority shareholders of privatized companies. Rosneft is a state-owned company, it is the largest oil company, it has shareholders, its shares are traded on the stock exchange. Any shareholder of Rosneft, Sberbank, which is also owned by the state, or any other state-owned company should ask themselves: how will minority shareholders in these companies be treated? Will the government say that it is most concerned about the interests of the state, and not all shareholders? This is a sensitive issue, because Russia is preparing to implement a privatization program and will need to attract foreign as well as domestic investors. And, by the way, the issue of the quality of corporate governance is related not only to foreign but also to Russian investors. We need to ask ourselves: why do Russians take money abroad instead of investing it in Russia? Why do Russians go to London to resolve legal disputes instead of resolving them in Russia? This needs to be seriously considered if the government wants to move forward and develop various sectors of the economy, attract foreign investors.

Look at China. Many people may think that China grew with its own investment. It did not. China’s growth was based on attracting foreign investment, primarily from Taiwan. Some may think of it as Chinese investment rather than foreign investment, but in fact it was foreign investment. It was because of them that China began to develop as a major exporter. Investments from American, European and other companies helped China become the world’s leading manufacturer of automobiles, electronics, consumer goods, etc. I think the Russian government probably realizes that if it wants to succeed in raising the standard of living of Russians and realizing the enormous opportunities that exist in the country, it needs foreign investment. And the whole BP story confirms this: they didn’t say they could do it themselves, they got them involved [in the capital of Rosneft]. Why? Because BP has the technology and the means to develop fields in the Arctic and elsewhere. And if they treat minority shareholders badly, they won’t be able to attract the investment they are counting on.

Interview - Mark Mobius, Managing Director, Templeton Emerging Markets Group