Mark Mobius, ‘father of emerging markets’, says it’s time to buy small Chinese stocks as market reaches bottom

  • ‘We are probably reaching the bottom or near the bottom and the market is probably going to recover’, Mobius says
  • Investors should resist the temptation of using index funds – ones that invest according to the weightings of an index – to return to the market, he warns

China’s stock market is likely to have reached the bottom, according to Mark Mobius, dubbed the “father of emerging markets”.

But investors should resist the temptation of using index funds – ones that invest according to the weightings of an index – to return to the market, he warned.

Rather, they should focus on individual small and mid-sized companies that demonstrate good earnings prospects and carry low debt. These are the stocks that will be benefit from new regulatory policies, he said.

“Obviously, the Chinese government wants the market to perform better. We are probably reaching the bottom or near the bottom and the market is probably going to recover,” Mobius said in an exclusive interview with the South China Morning Post.

The MSCI China Index, which tracks 738 stocks, fell 14 per cent in the first quarter, adding to a 21.6 per cent slump in 2021.

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Beijing’s sweeping crackdown on the technology sector that began last summer, coupled with the risk of Chinese companies being delisted in the US and fears linked to Russia’s invasion of Ukraine, formed a perfect storm that knocked US$1.9 trillion of market value off the index members in a 15-month period.

Mobius, who will turn 86 in August, is known to the public as the “father of emerging markets” as he has over 30 years of experience investing in emerging markets. Typically these are prone to higher volatility but also higher returns than developed markets.

Mobius was one of the early birds to invest in developing economies in Asia and mainland China.

Just a few months after stepping down as chairman of Templeton Emerging Markets Group in January 2018, he co-founded a new asset management company called Mobius Capital Partners with two other veteran managers, Carlos Hardenberg and Greg Konieczny.

Mobius is still bullish about China and other emerging markets.

“Do not buy the index, but buy individual stocks,” he said. He believes big tech companies, which dominate the major indices that track Chinese stocks, will be subject to further tightening of regulations.

The aim of Beijing’s regulatory crackdown was to prevent the biggest players from dominating the tech sector and create a more level playing field, a policy that hurt stocks such as Alibaba Group Holding and Tencent Holding but was to the benefit of smaller mainland Chinese companies.

“These big boys were basically dominating so many fields,” said Mobius. “It’s a good idea to look at the medium and small companies, because they are going to be benefiting from government policies to create a more level playing field.

“It is a good idea to choose those mid-size companies that have a good return on capital, and most importantly, do not have a lot of debt.”

Mobius said investors need not worry too much about high inflation. In his newly published book, The Inflation Myth and the Wonderful World of Deflation, he said the soaring prices in the US and other markets are the result of the devaluation of currencies.

“The traditional measure of inflation, which is the CPI, the Consumer Price Index, is quite inaccurate and flawed and not a good guide. But unfortunately, central banks around the world continue to use that measure and act upon it,” he said.

“It’s not surprising that when you have a big increase in money supply, the value of the money declines and prices go up. And they call it inflation. But actually, it’s really devaluation of the currency.”

Author: Enoch Yiu, SCMP

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