Mark Mobius, Ph.D.
Executive Chairman, Templeton Asset Management Ltd.

Among emerging and frontier market regions, Africa has increasingly been drawing our attention. We have been visiting South Africa for several years-we opened an office in Johannesburg in 1997 and we also have a number of South African companies in our portfolios. We believe that efforts by local companies to expand their international market share and the presence of capable management teams help us find bargains in the country. Higher global demand for commodities, a recovery in domestic demand and the preparations for and hosting of the 2010 FIFA World Cup should potentially further support economic growth in South Africa this year.

In addition to South Africa, we have been taking a look at lesser-known frontier markets in Africa, some of which are very large countries, such as Nigeria. Regional markets such as Egypt and Kenya are also beginning to look attractive, and we are seeing the growth of new markets in this region. Libya, for example, already has a stock market and is encouraging the privatization of state-owned enterprises—a development being repeated in a number of African countries.

When evaluating individual companies in these frontier markets, we use the same criteria that we would use for any other market in the world. First and foremost is the balance sheet. We look at whether the company is "faithful" in terms of its balance sheet. Then we look at earnings and earnings potential.

And most importantly, we look at management. In emerging markets and frontier markets alike, management ability is extremely important. We need to see managers who are capable of managing in challenging environments. Of course, there is another challenge that we see in these markets, and that is the custodial situation. We need a custodian bank that can safeguard our assets, look after dividend collection and so forth. That becomes a challenge in frontier markets. And at Templeton, we are actually pioneers in that area.

We believe the outlook for Africa is very good for three main reasons: (1) abundant natural resources, (2) a young population, and (3) heightened interest from rich emerging market countries. Africa has some of the world's greatest deposits of natural resources, and only a fraction of those resources have been tapped. In addition, it has a young and growing population that could improve their education and skills to become a major asset to expanded manufacturing and mining enterprises. These factors have stimulated the interest of countries like China and India, which require more natural resources for their growing economies, as well as countries like Russia and Brazil, which look to expand their enterprises into global operations. Countries around the world are showing growing interest in manufacturing within Africa for the African market, particularly emerging countries that have the capabilities to operate in challenging political and economic environments.

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