Valuations will drive investors back to EMs: Mark Mobius

Mark Mobius, Managing Director, Templeton Asset Management, said that with the western world and Japan effectively moving closer to a zero interest rate regime, investors will increasingly shift their focus toward emerging markets. "Investors will realise at one point: I am getting 1% or less with US treasuries and I can get 5-8% dividend yield on emerging market stocks. In addition to that fact that as people retrieve from the US dollar - because until now they had put everything into US treasuries - you will see the emerging market currencies begin to rebound again because some of them are undervalued," he said. "As people begin to move out of US treasuries, as they begin to realise that the valuations in emerging markets are so good, one is going to see that move out into the emerging markets."

Here is a verbatim transcript of CNBC-Asia's exclusive interview with Mark Mobius aired on CNBC-TV18. Also watch the accompanying video.

Q: I know you have a lot of expertise in the emerging markets area and I wondered given how much the US rallied over night, Asia didn't quite follow suit to the same degree. Is the risk appetite for emerging markets asset still pretty weak out there even though we are seeing some base building?

A: That's right. The spread between emerging markets debt interest rates and US Treasury is still quite high, although it has come down from its high point. That indicates that the confidence in emerging markets is still not there. There is no reason why it should be and given the fact that the US is in such dire financial situation and that's lapped over into the rest of the world. But we see going forward as people begin to move out of US treasuries, as they begin to realise that the valuations in emerging markets are so good, one is going to see that move out into the emerging markets.

Q: If you still believe that the US is driving this whole movement toward weakness, what are you looking for, for signs of a general economic turnaround, and of course the markets seem to usually anticipate these things, but what are some of those harbingers that you want to see?

A: In the US, you want to see the jobless numbers coming down. You want to see the Purchasing Managers Index go up. That will take time. I don't think you are going to see that until the middle or the end of next year.

But as you said, the market will anticipate that. That will happen in the first or second quarter of next year. Of course, emerging markets will then be impacted and be influenced by that.

Q: Is that because, in the western world and Japan, we are moving to an effectively zero interest rate policy and at that point investors are going to look at what they are getting on - their bond investments will say: we are not getting anything here, so let's look about?

A: Exactly. Investors will realise at one point: I am getting 1% or less with US treasuries and I can get 5-8% dividend yield on emerging market stocks. In addition to that fact that as people retrieve from the US dollar - because until now they had put everything into US treasuries - you will see the emerging market currencies begin to rebound again because some of them are undervalued.

Q: There is still the fact of course that many of these emerging market guys have been totally dependent on the US consumer. And they are still going to be under a heavy cloud in the middle of next year, and there will be no sign at all of any pick-up industrially?

A: Yes, there has been of course an influence of low imports into the US. But emerging markets' trade has now diversified. So, China, for example is not only influenced by the US, it is influenced by other emerging markets and by Europe of course.

But going forward, you are going to see much further diversification of trade, so that there is less dependence upon the US.

Q: Speaking of China, the World Bank today is saying that it has downgraded its forecast for China's GDP. It expects that to be about 7.5%. We know that the Chinese like to keep it at at least 8% to create 10 million jobs a year. But is it worrying to you from where you sit that if China is slowing down like this, it will have repercussions on the US and other economies globally?

A: Not really, because 7% is still an incredible growth. Remember that [the growth] is 7% in real terms, inflation adjusted. So, this is very fast growth.

Also, I believe that the Chinese will perhaps push that up higher. The 7% number may be a little bit too conservative because the Chinese have now revved up the economy, lowered interest rates and taxes, and instructed the banks to put more money into small and medium enterprises. They are taking a lot of measures to push up the economy. So, even if it is 7%, I am not too sad about that since 7% is great. But I think it may be higher.

Q: We also heard reports that China is considering another stimulus package. We know the US is also looking at one as well. How much do you think we are going to need globally in terms of fiscal stimuli to pump into the world economies, to get these economies on track for 2009 and 2010?

A: It is happening as we speak. The stimulus packages announced in the US, in China, in India, in Russia, in Brazil, and in many other countries are going to have an incredible impact going into next year.

You must remember from the time that they announce a package to the time it is implemented is at least two-four months. So the effect will take place later. It will take place, as I said, in the first quarter. Then you are going to see some real fireworks I believe.

Q: Are you encouraged by the economic team that [US President-elect Barack] Obama is putting together?

A: Yes, very much so. It looks like they are getting top-notch, very professional people, people with experience. I think it is going to be very exciting.