Investment Adventures in Emerging Markets

Long-Term Investing in a Short-Term World

In this electronic age, news and rumors can spread like wildfire across the globe, heightening market volatility as markets react in real time. It can be difficult for investors to see the forest for the trees as they try to dodge the downdrafts immediately in front of them, sometimes making hasty missteps. As my emerging markets team has wound its way through a series of recent European professional conferences, the challenge of long-term investing in a short-term world has been a key theme. At our last stop in London, I invited Tom Wu, Vice President, Senior Managing Director, Templeton Asset Management Ltd. and a veteran of more than two decades on our emerging markets team, to blog about his perspective on long-term investing in a short-term world. Read on for his guest post.

Tom Wu

We have increasingly become digital devotees in our daily lives. Electronic networks connect us with friends, family and colleagues, and provide us a steady diet of news, 24 hours a day. As news headlines circle the globe within seconds, it can cause investors to make decisions based on emotion and for markets to take dramatic twists and turns. When financial markets seem to be in crisis, we’ve witnessed a tendency for investors to more quickly pull out of markets or asset classes they view as “risky” and into what they consider to be “safer.” This “risk-on,” “risk-off” movement often occurs at times before all the facts are in—It’s often a case of “act first, ask questions later.”

Tom Wu

In my experience, that usually turns out to be the worst thing to do. Our approach is to ask questions first, before we act. Mark and the rest of the team at Templeton have learned much from the wise Sir John Templeton, who believed maintaining a long-term investment perspective was essential to long-term success. This approach has certainly been tested time and time again in the years we have been covering and investing in emerging markets. We’ve seen emerging markets post double-digit gains or losses within a month!

The lessons we have learned through these volatile periods are to take a measured, long-term perspective, trust our fundamental, on-the-ground analysis of individual companies, and above all, not react to short-term, often sensationalist news. We are certainly aware of the macroeconomic climate, but it is not the main driver in our decision-making process when it comes to a specific investment. We always seek out companies where we find strong cash flows and a record of returning cash to shareholders via dividends. We examine and meet with management and controllers of each company, whenever possible. Once we find what we believe to be an investment bargain, we typically stick with it as long as we believe the case for future growth potential is still strong.

For the average investor, accurate market timing is a difficult if not an impossible task, and the best guidance we can give investors to help weather short-term market fluctuations is to diversify across asset classes both domestically and internationally, although even diversification can’t guarantee a profit or protect against a loss.

Since any given event won’t impact every market the same way, at the same time, we believe it’s critical to invest across the globe, gaining exposure to economies where the prospects for growth look attractive. The 2012 Franklin Templeton Global Investment Sentiment Survey revealed that many investors have a strong “home country” bias, preferring to keep their assets in their own local markets, but geographic diversity means considering expanding beyond your home borders, wherever they may be, and thinking globally.

Of course, investors would prefer positive results every week, every month and every year, but we all know that’s impossible. If we focus on short-term results, the chances are we will get whipsawed by market volatility, and the results aren’t likely to be what we’d hoped. While past performance is not indicative of future results, we’ve witnessed a general tendency for bull markets to last longer and rise further in percentage terms, while bear markets generally tend to be shorter and fall less in percentage terms. However, many investors only remember the pain of the sharp, sudden loss, rather than the slow rise.

Putting it into Practice: Thailand and the Eurozone

Thailand’s 2011 brush with natural disaster is an example of how to put this long-term view into practice. Floods had ravaged the country that year, and investors focusing only on the short-term crisis saw a lot of financial doom and gloom. However, Thailand’s equity market generally weathered the events, rebounding by the first quarter of 2012 along with bumps up in consumer spending and government reconstruction efforts, and stimulative policy measures such as an increased minimum wage helped reinforce economic progress made since the floods receded. The International Monetary Fund now projects Thailand’s gross domestic product to grow approximately 5.5% in 2012 and 7.5% in 2013,1which looks pretty favorable to us compared with some other developed markets.

The European debt crisis today spells out a similar story of doom and gloom in the headlines, and the uncertainty has taken an undeniable toll on many markets around the world. I believe that the Eurozone crisis should eventually level out, because leaders there seem resolute in solving the fiscal deficit problem and have imposed discipline on countries which have not met their obligations. Now it’s true that many of the recommended austerity measures in some countries may not be adopted—either because of the lack of will on the part of the locals or because of the bureaucracy involved—but in our view, leaders are moving in the right direction by recognizing that what’s painful for many people in the short term is likely to result in a more positive long-term outcome for everyone.

That’s really the key message here, and it’s my motto: the world belongs to optimists.





1. Source: International Monetary Fund, World Economic Outlook, April 2012. © By International Monetary Fund. All Rights Reserved.

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