ED HARRISON: Welcome back to China Danger and Opportunity. We're midweek in our review of China and Hong Kong so let's recap what we've seen thus far and preview what's still ahead. Just yesterday, Leland Miller told us that an early year acceleration in Chinese growth has dissipated, and that we should expect official numbers to start to slow and to show deceleration. In regards to Hong Kong, Real Vision's documentary, "Tiananmen to Hong Kong: The Fight for Democracy," beautifully laid out the current state of affairs, both regarding the concerns around Hong Kong's role as a financial center and how the political upheaval is impacting the people on the ground, both in China and Hong Kong, but we still have some amazing content for you coming up.
Today, we are going to hear from legendary investor, Mark Mobius, discussing the insights on emerging markets where he has 30 years of experience investing. In his conversation with Roger Hirst, Mobius sheds light on how he currently sees the Chinese economy and where it's going, regardless of the current turmoil. Plus, there's still more. Tony Nash, the CEO and founder of Complete Intelligence will discuss his artificial intelligence platform that uses neural networks to forecast asset prices, including currencies, commodities, and equity indices, and how it relates to China and Hong Kong.
Joseph Chang will be on to provide us insights only an insider could muster and to put a bow on it, we're wrapping up our campaign with legendary investor Jim Rogers. Now, honestly, he scares us but at the same time, inspires us with the potential opportunities in China and Hong Kong. We hope that you've been enjoying this campaign as much as we have. Now, on to our interview with Mark Mobius. Thank you for watching.
MARK MOBIUS: Really, the big battle now is between this concept of a free market economy with free political structures, and the Chinese model, which is a free market economy but with a closed political structure.
These are risks that we always were looking at but for the first time, they're being more systematically governed.
Unfortunately, the central banks have interfered in the running of a market economy, because by the injections of cash into the system, by manipulation of interest rates and so forth, they basically are destroying the market allocation of resources.
ROGER HIRST: Mark Mobius is one of the most respected investors in the emerging markets space. He's had 40 years, over 40 years' experience, 30 of those at Franklin Templeton. Now, he's set up on his own with his own company with his name over the door. I wanted to find out why in an environment where active management is becoming increasingly hard, in a world where passive investing is on the rise, why he's decided to take the plunge and start again after such a lengthy and storied career? I always wanted to find out some of his views on China, Hong Kong and generally, what he thinks of the emerging market space today in a world that's dominated by Central Bank liquidity, and see what his thoughts are for the future of this space?
Mark, a very, very warm welcome to Real Vision.
MARK MOBIUS: Thank you.
ROGER HIRST: I think this is your first time, but we've been hunting you for quite a while I think. You've had this amazing career, 40 years in emerging markets. 30 years at Franklin Templeton, Chief Executive of the Emerging Markets Group. You've written more books than most authors would do in their time. You've been on the board of large emerging market corporates. You've been on committees of things like the World Bank Governance Forum.
Here you are, if you don't mind me saying it in your ninth decade and you decided to start it all again with your own company. Starting afresh this year with your name above the door with all the risks that take. Why now, and also, why in London?
MARK MOBIUS: Well, mainly because the industry has been changing. Since we started in 1987, the whole industry has changed from the truly active management era to a more passive management. In fact, just recently, the amount of money in passive funds, ETFs and index funds has now surpassed that of active funds. I thought, gee, I'm supposed to be an active manager, but yet the industry is changing. When you're in a big organization, there's a tendency for us to go with the flow. If you want assets under management, you have to do more passive funds.
I thought maybe what we should do is spin off and start something that's truly active because as you know, even the so-called active managers, at least in the past, and even now, follow the index. Watching the index all the time. I wanted to get away from that completely to something that was truly active and that's why we wanted to start something in the active area. Then also, we want to do something that was related to in the environment, social and governance, ESG era, because a lot of people are interested in that, and investors more and more want emphasis on ESG.
Looking at this, we thought, well, wait a minute, if you want to affect the environment and if you want to do something about the social situation, you got to have good governance to begin with. That's what we're focusing on, we're focusing on governance. We're going to companies that are willing to engage with us. In the past, we used to have big legal battles and fights and so forth, we found out that doesn't work in the long run, the best way is to get engaged with the management of the companies and get them to change and improve their governance. That's what we're doing.
ROGER HIRST: It sounds like you're coming into this, you're going active, and you've also got a clear direction with the active but in a world which is going to only become increasingly difficult for the active manager, because let's pretend we went to a world, which hopefully will never happen, where it's 100% passive, then the whole rubric change where value doesn't matter. It's all about volatility, or dividends or things like that.
How is the strategy, how is your active strategy going to be able to deal with this environment, where it's just going to become harder and harder as active funds lose funds, always selling, passive funds are always buying and that active rule gets effectively overrun?
MARK MOBIUS: Well, the interesting thing in talking to various institutions, family offices, in particular, people with billions of dollars, they've been telling us, gee, we need more active because 50%, 60%, 70% of our portfolio is passive and we realized it's a trap, because basically, you have to follow the crowd. An index fund is basically based on the crowd, what everybody else is doing, the biggest stock, the most popular stock is the stock that's going to have the biggest weighting in the index, and you've got to follow that.
A lot of people realize it's dangerous, because the crowd may not be right. In fact, we know the crowd often is wrong. They're saying, "Okay, maybe we should have an allocation to active, truly active." That's what we're going after. I think there's still going to be room for people like us.
ROGER HIRST: People should think of active management in some ways as effective form of optionality that when this whole edifice of passive investing, I don't say comes crashing down, but when it has its dark days, then the active managing should hopefully give everybody some cushion against that potential.
MARK MOBIUS: That's right. That's exactly right. In fact, that's another reason why a lot of investors are saying, "In order to reduce volatility," because if you are all moving in the same direction, your volatility is going to be very high, "In order to reduce volatility, let's go to something that is different, that's going to behave differently," and that's the active management.
ROGER HIRST: With the ESG angle, there's always this cynicism about well, yes, it's do good. Actually, you should be looking for the best returns. It's great to be moral but also, it's good to basically make sure my pension works. Is that still a valid pushback, or do you think that or can you see that the ESG investing is providing returns which can outperform?
MARK MOBIUS: Well, that's the beauty of this orientation is that the studies that I've done so far show that high ESG rated stocks do better than low ESG rated stocks. More importantly, and where I'm emphasizing is, is that we're not necessarily going after companies that already have a high ESG rating, but companies that don't yet have that, but will improve, because their performance, we believe, will be even better. You get a better upside.
That's a very interesting thing. We pointed out, we just did a book called, "Invest for Good." In that book, we show that if you're taking a long-term view, and if you are investing in good ESG companies, your performance will be better.
ROGER HIRST: With the ESG investing where you're looking for those that have maybe a low score, does that mean that effectively what you're doing with the capitals, you're looking for companies where they will benefit from the capital that comes in, and therefore they are going to, through your investments, they're going to move up the scale, because there's always the cynicism around ESG that ESG is got a moral thing but it hasn't got the elements of necessary the best profitability?
MARK MOBIUS: Exactly.
ROGER HIRST: In your words, you actually see that ESG is actually a better way of investing than simply just saying, "Well, it's nice and warm. We feel good about ourselves." It actually gives better returns.
MARK MOBIUS: It's interesting, because when we started in 1987, ESG was not around. The concept of the environmental, social, governance issues were not really discussed, but inadvertently, we were paying attention to those issues, because it was risk control. At the end of the day, let's say you're in a mining company. The mining company has the risk of telling its dam being broken and flooding the whole environment, and they're being fined by the-- and of course, being hit by the local government in what they did. That's a risk and that's the environment basically.
Same thing on the social side. If the company has bad relationships with the community and with their workers, they're not going to do very well, it's a risk. The governance, of course, same thing. If you don't have good show of the relations, chances are that people will not want to invest in your company. These are risks that we always were looking at but for the first time, they're being more systematically governed. If you look at the United Nations Lyst, the sustainability Lyst, basically, it's a list of risks that you have to try to control.
ROGER HIRST: How does this ensure that capital goes into the right areas. For instance, I think in the diversified energy sectors, there's quite a high hurdle rate of return on capital that investment is going to require from the dirtiest ends of the energy market versus the cleanest ends, or not just the dirtiest end, but needs the most capital investment to turn them from being let's say, dirty energy, dirty coal into much more cleaner varieties through technologies, is the danger that in some ways, like passive versus active, ESG could starve areas that desperately need the capital to move in. I know you mentioned that you're looking for those that can move up, but how do you ensure that those that need it, get it even if they score badly?
MARK MOBIUS: That's a very, very good point, because you're absolutely right. These ESG funds now, or ESG companies, highly rated ESG companies, big investors will say, "Look, I will just invest in those companies or in those funds, those index funds." You're right, the other companies that need the capital to improve are not getting it. That's why we believe that's where the emphasis should be, which go after those companies to help them improve.
Now, some industries, of course, are really in a very difficult position. If you look at, for example, coal burning power companies, it's really an issue. I personally believe that these could be cleaned up because they're emitting carbon dioxide. If the carbon dioxide could be captured and used to grow plants, you could have a really good situation. Unfortunately, the cost and the technology is not up to par yet and those costs is quite high.
ROGER HIRST: You've done the ESG and the ESG has been something you've been focused on for actually quite a long time, but the other thing that obviously people think about you for is the emerging market side, which is ESG in emerging markets. How do you see emerging markets right here, because there's these been this big structural shift, almost a megatrend through your career where you probably were in that globalization trend, which may have now peaked, and we're now moving toward regionalization. How do you see that these big changes coming through now versus maybe when you started in this 40 years ago?
MARK MOBIUS: It's really interesting to see the progress. When we started in 1987-- before that, I was at MIT, I sat in the economic development. In those days, the economic development theory was based on, well, maybe if we build a steel plan, the country will grow, or maybe let's build a railroad and the country will grow, because they couldn't explain why countries were not growing, because you had the so-called Third World, the underdeveloped and so forth.
Finally, the World Bank, IFC and these multilateral institutions began to realize that if you want a country to grow, you got to have a market economy. That means you got to dispense with socialism, communism, and dictatorships that control the economy, you got to have a market economy. That's where we started.
In 1987, when we had the very first emerging markets funds listed on the New York Stock Exchange, we had only eight markets in which to invest. That was it, Hong Kong, Philippines, Thailand, Malaysia, Singapore, and Mexico. That was it. There were no other markets we can enter, because either they didn't have stock exchanges, they were a socialist country, everything was owned by the government, et cetera, et cetera.
Now, we're at 70 countries around the world that have privatized, have opened up markets and established capital markets. The realization that you need a market economy to allocate resources has now really sunk in. Unfortunately, though, there are now forces in the developed as well as the emerging world, which is saying, "No, the government has to take back all of this." Here in the UK as you know, Jeremy Corbyn says, "Look, in order to give cheap medicines to people, we got to have a government drug company."
Well, that's going in the opposite direction from a market economy. That, I would say, we're at a very, very important juncture in the history of development around the world. If we back away from the market economy concept, I'm afraid things are going to go backwards.
ROGER HIRST: With market economies, I guess, the famous one, the big one, the one that people make fortunes on. You went to China very, very early in this whole process, most people really think of China post-WTO in the early 2000s but you were there a decade earlier before. What is it in an emerging market, and maybe within China at that time that made you sit up and go, we got to get in there and then follow it through?
MARK MOBIUS: Well, first of all, the incredible enterprising spirit of the Chinese people. I was based in Hong Kong at the time and Hong Kong was a model of a market economy. In fact, The Economist were always visiting Hong Kong to see how it worked, because it really epitomize what a market economy does and how successful it can be, despite the fact that it was a band rock. When the British troops came there, there was nothing, no resources.
That's what really excited me. I thought, well, if that's happening in Hong Kong, it could be happening in China. Then Deng Xiaoping came out and said, "Look, I don't care if the cat is black or white as long as it catches mice." That was a turning point, because he said we've got to now adopt the market economy concepts. Because what they were doing, the Chinese were saying, "Look, we want to overtake America." Mao made this famous statement about we're going to run a 100-year marathon and we'll overtake America.
How do we overtake America? What makes America safe? What make America strong? It's the market economy. That's really, and that's what they adopted in China. They adopted the market economy while separating the political structure from the market. That's the model that they used.
ROGER HIRST: Today, China's on everybody's lips, it's the key and Hong Kong. Most people probably say that China's drifting back away from the open towards the socialist. How do you see China today? How do you see it developing? Because it pushes people to two extremes, it's either very, very bad, or it's very, very good and that middle ground is not really populated as much as it should be. How do you see China today evolving? Then how do you see Hong Kong within that because Hong Kong, is that something which is going to reach an endgame soon?
MARK MOBIUS: Really, the big battle now is between this concept of a free market economy with free political structures and the Chinese model, which is a free market economy, but with a closed political structure. This is the real battle that's being-- ideological battle, I would say, that's being fought. I think there are many people in China, although they probably wouldn't want to admit it, realized that in order to get that next step in progress, they're going to have to free up the political system.