By Mark Mobius

Managing Director

of Templeton Asset Management

Recently, we have seenvolatility acrossemerging marketsand investors rush toraise cash in an effort

to reduce their exposure to thesemarkets.

Given the rout in global emerg-ing stock markets we’re witness-ing today, I’m not very worriedbecause this is not the first timemarkets have corrected or thatwe’ve witnessed uncertainty inthe markets. Investors shouldexpect volatility, as is the natureof any stock market, but weexpect long-term investors to berewarded.

It’s impossible for anyone,regardless of how much experi-ence they have in stock markets,to predict exactly how much amarket is going to decline beforeit turns around. No one can pre-dict the market direction and abear or bull market could start atany time. However, the good

news is that bear markets areshorter in duration than bullmarkets and bear markets godown a smaller percentage thanbull market increases. This iswhy one must invest with a long-term view.

The current market decline is

not comparable to the AsianFinancial crisis of July and Octo-ber 1998 for the simple reasonthat Asian markets, and for thatmatter most emerging markets,are in a much better position thanthey were about 10 years ago.

The crisis in 1997/8 began inAsia and spread globally.

Currently, however, Asianeconomies are better equippedthat they were 10 years ago toweather any global issues/slow-down as many have abandonedtheir pegged exchange rates,decreased short-term debt andbuilt up large current accountsurpluses and foreign exchangereserves.

Most Emerging markets are infact now benefiting fromstronger economic growth, rela-tively lower inflation and interestrates, the implementation ofeffective fiscal and monetarypolicies, stable political environ-ments, improving corporate gov-ernance, the enhancement ofcompetitiveness through removalof subsidies and reduction oftrade barriers, higher productivi-

ty and consumption because of ayounger and better trained laborforce, and so forth.

Asia is the largest emergingmarkets region in the world andhome to some of the fastestgrowing economies globally. Infact, more than 50 percent of theworld’s population lives in Asiaproviding the region with a hugeconsumer base.

One of the key supporting fac-tors for investing in Asia is itsrobust economic growth. Asianeconomies have not only beengrowing faster than developedcountries in North America,Western Europe, Japan, Aus-tralia and New Zealand but alsotheir emerging markets counter-parts.

Over the last ten years, Emerg-ing Asia has recorded an averageannual growth of 7.3 percent,compared to 2.7 percent fordeveloped markets and 5.8 per-cent for global emerging markets.

Moreover, economists expectthis growth trend to continue forthe foreseeable future. EmergingAsia is expected to grow 8.8 per-cent this year, more than triplethe developed markets’ 2.5 per-cent forecast. And in line withthat, the earnings growth inEmerging Asia is expected to bemuch stronger than that in thedeveloped world.

Asia’s economic growth hasalso been supported by theregion’s export growth momen-

tum and more recently by grow-ing consumer demand.

In addition, dependence on theU.S. as an export outlet has beendecreasing in the region. Japanand China’s role as outlets forexports from the rest of Asia alsoneeds to be underlined. In addi-tion, lower labor costs allowAsian markets to undertakecompetitive pricing to boostexports.

Fundamentals Remain Intact

One of the main investmentthemes in Asia is increasing con-sumption.

As a result of increasing percapita incomes and relativelyyoung population structures,Asian economies are increasingdomestic consumption of a widerange of goods. For example, inIndia and China, the number ofcellular phone subscribers per100 people in 2006 was 13 and35, respectively.

While in developed marketssuch as the UK and U.S., it was117 and 77, respectively. Thus,the potential for growth is enor-mous, with this growing demandexpected to further boost domes-tic consumption and industrialoutput, leading to greater corpo-rate earnings in the region.

Commodities have also been animportant driver in Asia, giventhe increased demand fromAsian industries. This growing

demand is expected to furtherboost domestic consumption andindustrial output.

Additionally, we’ll see countriesin Asia converging more andmore as they increase trade witheach other. We see this growth inthe trade that Taiwan and Koreaare experiencing with China. Moreover, companies with good

corporate governance can beexpected to attract greaterinvestor interest. As a result ofcorporate scandals in the U.S.and other developed markets,Asian markets are no longer per-ceived in such a poor light com-pared to developed markets inthis regard.

More importantly, globalinvestors’ heightened awarenessof corporate governance, hasforced Asian companies toimprove their standards. Whilesome improvement has beenseen, there is still a lot to be doneand we expect to see continuedprogress in the future.

My advice to emerging marketinvestors would be not to panicfor recent volatility. It is veryeasy for us to be caught up inemotions or simply follow theherd.

I would suggest that investorstake a long-term view to invest-ing and carefully evaluate theiroptions. History has shown usthat the best time to buy is wheneveryone is despondently selling.This enables us to pick up stocks

at more attractive prices. The best strategy would be to

remain diversified rather thanpick one or two countries in theemerging market universe, sinceit would be difficult to knowwhich market will outperform.

Thus, maintaining a diversifiedportfolio will allow an investor tobetter manage his/her risk levels.Also, value is the key. The bestprotection is to select companiesthat are selling at a discount towhat they are really worth andcompanies with good manage-ments capable of realizing thefirm’s intrinsic value.

Templeton’s value investingstrategy serves our investors wellin these times of volatility as weinvest in undervalued opportuni-ties and adhere strictly to ourvalue philosophy. Our invest-ment strategy is focused, deter-mined and constant. It is found-ed on value, patience and funda-mental research.

Companies are evaluated on afive-year investment horizonwith a focus on long-term poten-tial, and not on short-term fluctu-ations. This also means that wedo not “chase” stocks; rather, weallow undervalued securitiestime to appreciate as they gainrecognition by the market.

The markets may continue tobe volatile at times, but theunderlying fundamentals ofemerging markets remain intact.

Real Estate Bubble: Real and Imaginary

By Mauro F. Guillen

Director of Lauder Institute

at Wharton School

Characteristically, theyare based on assump-tions that at somepoint turn out to beunrealistically opti-

mistic or otherwise at odds witha supposedly “hard’’ reality.

When a bubble finally bursts,people always ask two questions.First, why did it last so long?And second, why are the effectsso severe?

Obviously, the two are relatedto one another.

Of all bubbles, those involvingreal estate have the potential oflasting for a long time and hav-ing devastating effects.

The reasons are that peopletend to be extraordinarily opti-mistic about real estate prices,they tend to participate in thecreation of the bubble with bor-rowed money, and when the firstsigns of trouble appear, it isalways easy for new buyers towait and see, thanks to the exis-tence of a relatively well-functioning rental market.

Much has been writtenrecently about the existenceof real estate bubbles in sev-eral European, Asian andNorth American markets.

Central banks, govern-ments, international agen-cies, lenders and mereobservers have pointed outthat the combination of sev-eral years of hefty priceincreases and tighter creditconditions as of recent mightbring about a self-reinforcingspiral of decline in real estateprices. While I do not wish toignore the signs of troubleahead, it is important to putthings in perspective.

The market for real estateis a peculiar one.

People buy real estate becausethey need a place to live or tovacation. They also buy it as astore of value or, yes, to specu-late.

Moreover, in some economies,the real estate sector has come toplay a very important macroeco-nomic role. Cheap credit guaranteed by real

estate has made it possible forpeople to leverage themselves asinvestors or as consumers.

In the United States, the on-going subprime crisis is scarybecause so much economic activ-ity is driven by consumptionitself fueled by borrowing againstreal estate assets.

As a recent study by the Inter-national Monetary Fund states,one should only be concerned

about rising real estate priceswhen incomes do not grow atthe same pace.

Between 1999 and 2006 realestate prices in the U.S. rose byabout 6 percent annually.Incomes rose by just about 2 per-cent annually over the sameperiod. Given that foreign purchasers of

U.S. real estate account for only atiny fraction of all transactions,the trend cannot be sustained,especially now that credit is notas cheap as a few years ago.

In most East Asian countries,by contrast, incomes have grownfaster than real estate prices.

For instance, over the sametime period, China saw an annu-al hike of 2.6 percent in realestate and a whopping 9.5 per-cent in incomes. In South Korea, the correspond-

ing figures were 2.2 and 3.7 per-cent.

True, during 2006 prices wentup by 12 percent, and by asmuch as 20 percent in the Seoularea. Based on this figures, TheEconomist magazine declaredthat the fear of a real estate bub-ble in much of Asia is exaggerat-

ed. Reasonable people may look at

the same set of figures and reachdifferent conclusions, dependingon their assumptions aboutfuture trends and events and ontheir attitude towards risk.

I believe that in a country likeSouth Korea the most seriousrisk right now is not so muchthat there might be a correctionin real estate prices but ratherthat the government and keyeconomic agencies might overre-act to the threat.

Although inflation remains low,the Bank of Korea seems to beinclined to raise interest rates atthe first sign of trouble. Such amove would increase paymentson existing loans and depressasset prices. As a side effect, itmight reduce consumptionenough to affect the rate of GDPgrowth. At a time when theSouth Korean economy is grow-ing more slowly than it used to,the central bank needs to care-fully weigh the consequences ofits actions.

Governments, including theSouth Korean one, can alsochange regulations, espe-cially taxes, in order toensure a soft landing ofreal estate prices.

An important factor tokeep in mind when design-ing such regulatorychanges is to aim at theright target.

Changes in taxes or realestate rules should not dis-courage first-time home-buyers; they should targetspeculators. But theyshould be carefully cali-brated so that even specu-lators in real estate have away out. Eradicating spec-ulation in the short runcauses a bubble market tocrash. The change has to

be gradual so that all actorsinvolved can adjust.

Perhaps the most importantrole the government can play inthe middle of a real-estate bub-ble is to ensure that banks aremaking the appropriate provi-sions to protect themselvesagainst the potential negativeimpact of non-performing loans.

As long as profits during goodtimes are set aside to cover loss-es during bad ones, the financialsystem will remain a solid pillarof economic growth. This shouldbe the utmost priority. Hence,governments and governmentagencies need to carefully assessthe combination of measures —monetary, regulatory and others— that facilitate the smoothdevelopment of markets, includ-ing the market for real estate.

Mauro F. Guillen

Bubble Essential Part of Market Economy

Emerging Markets to Reward Long-Term Investors

Mark Mobius

4 FRIDAY, AUGUST 31, 2007 EquitiesPAGE