Leaving the largest position in China, as opportunities there will continue to expand in the next 10-20 years

—An exclusive interview with Mark Mobius, the Godfather of Emerging Markets and co-founder of Mobius Capital Partners

Owing to the impact from the COVID-19 pandemic, Mark Mobius, who moved “step by step” to a hotel in Germany, finally had “enough spare time” to reply to the interview outline from Weekly on Stocks.

The 83-year-old Mr. Mobius has more than 40 years of dealings with China, duly earning him the title of a “China hand”. Admittedly, he can also be called a “Singapore hand”, “South Africa hand” and, etc. Mr. Mobius likes traveling; yet he likes investing in emerging markets more, which has delivered good profits. He is known as the “Godfather of Emerging Markets” by the investment community. At present, the legendary investor has his largest position in China, and is optimistic about its economic development prospects in the next 10 to 20 years.

After having served Franklin Templeton Investment (FTI) for more than 30 years, he has always been grateful to FTI and China. One reason is that the funds he managed during his FTI years made a 3x return from investing in a Chinese company. As for investing success, he said, “value investing holds the key to investing, and the difference is often related to a company’s future profit potential.” His motto to young Chinese investors is: “Stay open-minded and keep learning.”

A more serious global crisis will not take place

Weekly on Stock: You are a “frequent flyer”, often on business trips to countries around the world. Not long ago you were in South Africa. If we were right, now you should see this outline in a hotel in Munich, Germany. Let's first talk about the changes brought about by COVID-19 to your work and life. What is the biggest change? Is there any difference among countries in their COVID-19 response and control?

Mark Mobius: Yes, I’m now in a hotel in Munich, Germany.  The COVIC-19 panic has impacted my life dramatically.  Normally I am not in one city more than two weeks and now I was locked down in South Africa for about two months and now in Germany for over a month.  Yes, there is a big difference among countries in their COVID-19 response and control.  The South Africa government responded in very dramatic and extreme way by shutting down the country and not allowing people to go out of their homes.  While there I was not even able to take a walk on the street.  In Germany the policy has been more intelligent allowing people to go out as long as they kept their distance and wore masks indoors.  Singapore, where I have my apartment has been one of the most extreme so I have not been able to return there and probably will not be able to do before August or September.

Weekly on Stock:In response to the pandemic, the U.S. has resorted mainly to huge liquidity injections into the market. China, by contrast, adopted primarily fiscal policies, such as tax cuts and poverty relief. We’d like to hear your take on the two distinctly focused policy approaches?

Mark Mobius: The Chinese response was more effective, I believe, since it was designed to get more people to work and provide financial means for businesses to survive as well as taking care of the most impacted people.  The U.S. did some policies such as “helicopter money” mailing cheques to people all over the country but such payment last only for a certain period of time. The real requirement is for people to return to work and to provide jobs.  The Chinese have wisely increased infrastructure spending.  President Trump is now considering that in order to provide jobs.

Weekly on Stock:The ongoing pandemic has made us more keenly aware of the potential risks facing the world, including debt crisis, deterioration in Sino-U.S. ties, supply chain relocation, and after-effects of low interest rates. What do you make of our current environment? Is a crisis of greater severity coming?

Mark Mobius: No, I don’t think a crisis of greater severity is coming unless the governments around the world do not relax their shut-down policies.  If such policies persist so that people are not able to return to work and socialize there will be a great deal of domestic turmoil and demonstrations leading to violence between government forces and the public.

Weekly on Stock: The epidemic is also shaking the foundation of globalization. What is your assessment of the current de-globalization trend’s impact on economic development?

Mark Mobius: I don’t think there will be de-globalization. The world now is simply too interconnected. Technology has given mankind the ability to communicate with everyone else in the world at low or no cost.  This kind of interconnectivity will not go away and with 5G it will even increase.  Yes, there is a trend toward bilateralism rather than multilateralism but trade, cultural and financial interactions and agreements between countries will increase not decrease.  The China-US trade disputes have only served to put these interactions on a more realistic level insofar as multilateral agreements have often not considered the impact of these agreements on specific countries and sectors.  Now that problem is being addressed.

Weekly on Stock: You recommend that investors hold 10% in physical gold and 90% in stocks, as well as retain some cash now to load up later. Is this sufficient to protect the asset safety of investors? Is it necessary for investors to buy some shares in both emerging markets and mature markets like you?

Mark Mobius: Gold is money and with the proliferation of currencies including crypto-currencies around the world it makes sense to hold some gold even if it does not pay interest or dividends. But then in order to protect against the continuing devaluations of currencies around the world, including the US Dollar, it is important to be invested in both developed and emerging country equities since earnings of companies adjust for currency devaluations.  Since emerging markets now represent over 50% of total global GDP with a growing share also in market cap it is important to have investment such markets.

Weekly on Stock: When a crisis strikes, the entire financial system may run into trouble. Yet the crisis will always end. Do you think you need to figure out how the financial system solves its own problems in order to predict your investments?

A: You always must expect economic cycles and thus stock markets will lead such movements. Unfortunately you can’t predict these movements and thus investments must be based on the specific behavior and characteristics of individual companies.

Sino-US relations will be as good as in the past

Weekly on Stock: Mark, you saw the opportunities in the China market long ago. In 1987, you led colleagues at the emerging markets division of Franklin Templeton in setting up an office in Hong Kong. In 2018, you founded your own company Mobius Capital Partners, and have remained bullish on the China market. It’s been 13 years now. Is the ROI in the China market in line with your expectations? From 1987 till now, China has carried out many important reforms, while also experiencing several crises. Why have you remained consistently bullish on China?

Mark Mobius: I have remained consistently bullish on China because since the time when I first visited China in the 1970’s and the when I started investing in 1987, I have seen the incredible march of the Chinese people towards a more prosperous life. The story of China’s rise to become one of the fastest growing countries in the world is very inspiring.  In the meantime, it has opened up great opportunities for investors like me to invest in world-class Chinese companies whose ROI are among the world’s highest and with earnings growth among the world’s best as well.

Weekly on Stock: At present, the risk of China-US economic decoupling is of great concern. In addition to the actual conflict of interest, the cultural differences between China and the West are also very obvious. How should China respond to a better development environment?

Mark Mobius: I believe China and the US will have good relations in the future as they have had in the past.  The beauty of the relationship is, in fact, the cultural differences and philosophical differences which do not need to clash but actually can lead to accommodation.  The U.S. is a young country and culture of only a few hundred years while China’s culture reaches back thousands of years.  Therefore you have a situation where the Chinese are able to draw on their incredible experience in dealing with foreign nations during that long history.  The patience and long view of the Chinese is legendary while the impulsiveness and fast-acting Americans is different.  These two ways of thinking, oddly enough, can fit together nicely.

Weekly on Stock: China's Confucian culture is considered to "hinder" innovation. What do you think about the future development space of China’s economy, especially challenges facing its technology innovation?

Mark Mobius: The Confucian traditions have been a big strength for China since it encourages respect for education and teachers.  This has meant that China has educated more and more top scientists who have made a number of scientific and technical innovations.  The Chinese tradition of learnings from others has served the country well since they have been able to absorb the knowledge found in Europe and America as well as Japan.  Up to now it has been very much of a student (China) teacher (U.S., Europe and Japan) relationship but that is changing and now China is beginning to create innovations on their own. So technological innovations will help drive the Chinese economy going forward.  If we go back in history we must remember that the Chinese were responsible for many technologies unknown in the rest of the world (porcelain, silk, gun powder, etc.) 

Weekly on Stock: China’s manufacturing sector is being gradually moved to Southeast Asian countries like Vietnam. Will China benefit from this process, just like Japanese companies benefitting the most from China’s economic rise?

Mark Mobius: Yes, as wages rise in Chinese it is necessary for Chinese companies to move manufacturing to lower wage areas just as the U.S moved its manufacturing to China.  This, of course will be beneficial to those Chinese companies and will enable them to move up the value chain by engaging in higher technology manufacturing and production.

Weekly on Stock: What is your view about when and how China will become the world’s largest economy?

Mark Mobius: In the view of some economists Chines is already the world’s largest economy. But that is not the important thing. The important thing is to have an economy which offers the highest quality of living to the citizens of the country. Quality is more important than quantity.

Weekly on Stock: You had lived in Hong Kong for a long time. What do you think of the future development of Hong Kong?

Mark Mobius: Hong Kong will continue to be a unique place and I believe the Chinese government will want it to continue as an important financial centre and place for foreign investors can be based.  At the same time Hong Kong has helped introduce foreign trade practices to companies in China and as served as a catalyst for investment into China.  This will continue to be the case.

Opportunities in China will continue to expand in the next 10 to 20 years

Weekly on Stock: During an interview earlier, you mentioned that you have a 20.1% position in China, the proportion of which is tied for the first place with that of the Indian market. Does this position cover A-shares? And what is your predetermined income target for this part of the position? How should we view China’s investment opportunities in the next 10-20 years?

Mark Mobius: Yes our position is the largest in our portfolio and included China A as well as Hong Kong shares.  The income target is 20% per year.  In the next 10-20 year we expect opportunities to China to expand because of the increasing efforts of the Chinese government to father open the market to foreign investors.

Weekly on Stock: What are the opportunities that China's consumption upgrade brings?

Mark Mobius: We are interested in three sectors: consumer disposables, health care, and education. We believe that those three areas have the greatest growth opportunities. 

Weekly on Stock: Among the good companies of "new consumption", The share price of Alibaba that you followed earlier is currently close to historical highs. What is the value of the investment now?

Mark Mobius: We have a saying: “The best time to invest is when you have money.”  No one can predict what the price of Alibaba will do from one day to another or one month to another.  What we do know is that if the company is destined to continue growing then it is good to invest in it. 

Weekly on Stock: In FY2020, Alibaba’s GMV exceeded US$ 1 trillion, equivalent to 1/14 of China’s GDP. In its financial report, Alibaba CEO Daniel Zhang said at an analyst earnings call that the company’s GMV should grow by at least RMB 1 trillion in FY2021. Do you think Alibaba can realize that goal? What is your analysis on Alibaba’s fundamentals?

Mark Mobius: I am not an expert on Alibaba simply because we focus on smaller and medium size companies.  However, it is certainly feasible for Alibaba to reach those goals. 

Weekly on Stock: China is currently building 5G infrastructure. Will you invest in 5G related companies in China?

Mark Mobius: Particularly technology companies related to 5G.

“Short bull and long bear” of A-shares is an illusion

Weekly on Stock: You stated at the end of March that you would dare to buy cheap stocks in emerging markets. Looking at it now, it is the US stock market that has seen a strong rebound.

Mark Mobius: We are now in a “V” shaped recovery  not only in the U.S. but all over the world.  The COVID panic was just that, as panic, and people soon come to their senses and quickly get back to work and business.  This is why the U.S. stock market is rebounding but also other market are rebounding including China and other emerging markets from Brazil, to South Africa, India and many others. 

Weekly on Stock: After the COVID-19 outbreak, you counted the dura ion of bear markets and bull markets in 11 countries around the world. The conclusion is that bear markets are often shorter than bull markets. However, in the case of the A-shares market, bear markets have lasted much longer than bull markets. For example, A-shares saw a bull market start in July 2014 and end in June 2015, with less than one year in between. From 2015 to 2020, A-shares saw no bull market. In the future, is it likely for A-shares to show a pattern of “long bull and short bear”?

Mark Mobius: The Shanghai Composite A Share Index shows that from Dec 2015 to Feb 2016 there was a bear market with the index declining by 26%. So about  only three months of bear market. But that was following by about 24 months of a bull market rising 33% between Feb 2016 to Jan 2018.  There was about 12 months of bear market declining 20% between Jan 2018 to Jan 2019.  This was followed by a bull market rising 30% between Jan 2019 to April 19 of only three months.  After April 2019 the market went sideward declining by 9% up to now.   Please remember that we define a bear market as a decline of 20% or more.  So you can see that the China A share market has behaved according to expectation with bull market lasting longer than bear markets.  But in the period from April 2019 to now the sideward movement of the market can’t be defined as either a bull or bear market. 

Profit-making is profit-making, not depending on the nationality of a company

Weekly on Stock: You often visit listed companies around the world and think it is more and more convenient to collect information, but to know the people behind a company remains the greatest challenge. What qualities do you think good management of listed companies need? Are the qualities expected of top executives at consumer businesses and those of tech companies the same?

Mark Mobius: Good managements must be transparent and observe good ESG rules – good environmental, social and governance behaviours.

Weekly on Stock: What is the prospect of the method of ESG investing in the Chinese market? What is the core of ESG investing?

Mark Mobius: Chinese companies are becoming more and more aware of ESG requirements. The core is transparency. 

Weekly on Stock: You like to go to the company to do some research, why do you have such a "hobby"

Mark Mobius: The key is to learn more about the companies and understand the work environment as well as the management. 

Weekly on Stock: American investors see value investing is more and more difficult in the U.S. However, value investing is gaining recognition in the A-shares market. What do you think of the difference between the U.S. stock market and the A-shares? 

Mark Mobius: Fundamentally there is no difference.  Earnings are earnings regardless of the nationality of the company.  Value investing is always important but value can be defined in different ways.  The key is the future earnings potential of a company. 

Weekly on Stock:You’ve turned 83 this year. Over all these years, what are the reasons for your successful investing? What’s your take on value investing?

Mark Mobius: Value investing is the key to investing.  The difference is often related to the future earnings potential of a company. 

Weekly on Stock: You have served Franklin Templeton for more than 30 years. What is your biggest gain at this company? Which aspect you are most grateful about?

Mark Mobius: The biggest gain was with a Chinese company where we more than tripled our money.  We were certainly grateful by that!

Weekly on Stock: My last question is: What are your advices for young investors and Chinese investors, respectively?

Mark Mobius: Keep an open mind and continue to learn.