Mark Mobius, the legendary fund manager and managing director of Franklin Templeton, believes Argentina is the most exciting market for equities in Latin America and compares it to South Africa. “By exciting, I mean riskiest and the one where the potential returns could be highest,” Mobius, who manages $37 billion mostly in EM equity funds, tells LatinFinance.

Mobius compares the troubled sovereign to South Africa, which he deems the most enticing EM bourse globally. “Many South African stocks have been devalued because of so much political uncertainty that has existed. However, the country has so many well-run companies and solid fundamentals,” says Mobius.

“Argentina is the most exciting EM in Latin America for the same reasons. The country has a great deal of economic uncertainty, the economic picture is dire, but there are fundamental aspects that are very good. It has many solid companies and strong consumer markets,” the investor adds.

However, Argentina is a long-term play and not the LatAm country where Templeton is most heavily weighted. Brazil is the focus.

Hunting Opportunity Locally
Mobius spends around 300 days a year travelling to emerging markets throughout the world, often on a private jet with a team of up to five analysts, and was last in Latin America – including Argentina – in January. Like many international investors and analysts, he is scathing of the Argentine government.

“[Argentina] is already on the radar screens of international fund managers,” says Mobius. “But the government is not sticking to its policies and that puts investors off. It has to remove all the restrictions on trade and on agricultural exports; it must encourage investment and open up to the world.”

The fund manager goes on to warn that President Cristina Fernández de Kirchner’s populist mentality could do significant long-term harm to the country. “[Argentina] has a historic opportunity but this Peronist idea, this notion that you have got to be popular with the masses, represents a dogmatic, impractical mentality,” says Mobius.

Argentina could be the breadbasket to a large part of the world. If it does not step up, Brazil would be ready to fill the gap, adds Mobius, who has much warmer words for Lula. “There was some populist talk in Brazil before Lula came to power but he has turned out to be very practical in his policies, very pragmatic.”

Unless the Argentine government is prepared to remove restrictions and free up markets, there will be no incentive for investment, says Mobius. “If it removes the restrictions, there will be greater investment, and productivity will increase. There could be higher inflation in the short-term but with the productivity rises, inflation would eventually be brought down and the country would have a sustainable future.”

The LatAm Decade
Despite a bullish focus on Argentina, Mobius is more confident about Latin America in general than the Southern Cone sovereign. “I am very optimistic about the region. As for Argentina, I am optimistic in the long-term, maybe ten years’ time. However, it could happen sooner.”

He believes that coming decades could belong to LatAm in the way that the past two have been dominated by the rise of Asia. “This could very easily happen, particularly if US foreign policy becomes much more realistic and looks at where its strengths lie and if America begins to take foreign policy initiatives in Latin America,” he adds.

For Mobius, LatAm has two main benefits: firstly, a population that throughout most of the region speaks just one language – Spanish – helping to create a single market and, secondly, incredible natural resources. “There is no other continent in the world quite like this one,” he says. “More or less, all of Latin America has a similar cultural identity. That is a huge advantage. China and India are vast markets but even in those countries there are very strong regional dialects.”

Mobius says the LatAm work ethic is not worse than in Asia. “I don’t believe there are any cultural reasons why Latin America should be different from Asia,” he says. “Latin Americans are not intrinsically lazy. I know many that work very hard. You have to create the right incentives, the right reasons, and people will work to fulfill them.”

LatAm stock markets have performed exceptionally well during the past five years, outperforming Asia. “However, the past is no prediction of the future,” says Mobius, who will not be drawn on how much LatAm bolsas could rise in the future. “It’s impossible to predict that. Most of our funds in Latin America are invested in Brazil, Mexico, Chile and Peru and we expect to make the best returns from them.”

Mobius recommends that retail investors have at least a five-year time frame and agrees that professional investors should attempt to do the same. “We have certainly increased our weighting in Brazil in recent years but it’s a risk for professional investors to change countries or companies too rapidly. If you find a good company, you should hang on to it.”

Undervalued Brazil
According to Mobius, Brazil still probably has the most undervalued stocks in LatAm without presenting too much risk. “It is such a deep market and you have to fully explore every part of it. But you cannot find extremely undervalued stocks without taking some risk. That could mean looking at Argentina and maybe even Venezuela and Ecuador.”

Mobius believes in the so-called ‘super-cycle’ for agricultural products, especially soya beans, but in the sense of the rise in demand from India and China for these products. “Prices might not stay at such high levels because there could be new sources of supply,” says the investor.

There is not yet a bubble in soft commodity prices, Mobius says. “I would not call it a bubble. One of the factors has been the depreciating US dollar and how that has affected prices. I would define a bubble as prices going completely out of control and we are not there yet.”

Mobius predicts that Brazil’s IPO market will be in the deep freeze until the gap for what issuers want and what investors are prepared to pay narrows. “We have seen IPOs cancelled worldwide. The situation could turn around very quickly, given the speed of today’s financial markets.”

He adds that the merger of Brazil’s Bovespa with the country’s futures exchange, BM&F, is a good idea. “It should lead to more efficiency and better market surveillance.”

Mobius also likes consolidation among the stock markets within the Caribbean. “The Caribbean markets should combine. They are too small as they are and they need to create more liquidity,” says the portfolio manager.

Furthermore, he highlights the importance of Mexico City and Panama to the capital markets of Central America. “It is only a natural thing for companies in Central America to want to list in Mexico. However, you cannot ignore Panama’s stock market. It has a favorable tax regime and could do a tie up with Colombia’s exchange.”

He believes that Mexico is too reliant on the US. “Mexico has been making some important reforms but it is so dependent on America for growth. Nafta helped it a great deal. But Brazil has now taken over Mexico as the biggest emerging market in the region. Its natural resources are so exceptional, only Russia surpasses it.”

Mobius is meanwhile a fan of dual listings of stocks in Latin America and London or New York. “I definitely think this is a good idea. There are big markets in Europe and North America. Cities like London are great places in which to do business.”

Paradigm Shift
Overall, Mobius detects a new paradigm in the world. “I think there is, in the sense that the US is not the centre of the economic world to the extent it once was. I think we have seen a continuous decline in the economic might of that country since the Vietnam War. The process has definitely become more pronounced during the past few years, as emerging markets have taken off,” adds the investor.

Looking back, the investor notes incredible changes that have taken place in LatAm during the past two decades. “A sea change in attitudes towards business and about the way in which economies should be run has taken place. Even Venezuela’s Hugo Chávez has not rejected private enterprise. It is not like the 80s – we have forgotten how socialist that decade was.”

Chile and Brazil have undergone the greatest positive economic transformations in the region during the past two decades. Chile achieved it over many years while Brazil has managed to do in a much shorter time frame, adds Mobius. “In Colombia, too, there are important economic and business reforms taking place,” he adds. “Peru is moving in the right direction.”

Unsurprisingly, Venezuela heads his list of countries in the region that have changed the most in a negative way during the past 20 years, followed by Bolivia, Ecuador and Argentina. “Those last three have not got their act together yet, not managed to fulfill their potential.”

Three decades’ ago it was LatAm that was the great hope, not Asia. However, Mobius, one of the most astute and experienced observers of equities in emerging markets in the world today, believes that Latin America’s moment could be about to come. LF