Recent correction 'usual', still in bull mkt: Mark Mobius
Q: What have you made of the volatility of the last few weeks? Do you think it is all leading up to a deeper correction or just a transient profit taking phase?
A: In this bull market, we will have some very severe and violent corrections. This is expected in a rapid run up of the markets. According to me, it is not unusual and I would not be surprised to see a correction of 20% or so. We should be alarmed about it. We are definitely in a secular bull market as long as the money supply continues to grow and the derivatives continue to be used. That market is growing and you will see a lot more liquidity in the markets.
Q: So far the correction has not been very deep. The Standard & Poor’s (S&P) has just lost 5% from its peak and then rebounded. The other emerging markets have given up maybe 8-10%. Do you think a deeper cut is waiting or this is it in the current leg?
A: I think a deeper cut will come as we go up. It is expected since many people will get frightened looking at the valuations. A number of analysts have not been too optimistic about what the earnings will be for next year. So these analysts will say, “We are at the peak and it is about time that we get out of the expensive stocks”. They will realize that the next year and the year after that it will be much better than expected and then the market will rebound.
Q: What are your observations on all this talk about the dollar carry trade and its potential unwinding? What it could do to flows or outflows out of emerging markets?
A: The US dollar carry trade is good and it will continue. If you study the yen carry trade, you will realize that they went on a lot longer than what people expected. So I believe that the US dollar carry trade will continue. The signals from the US indicate that they will not be raising rates anytime soon. So if you have differences of the kind that we are now seeing, we will definitely see a continuation of this US dollar carry trade.
Q: Are you in the camp which believes that, the dollar which has had a one sided fall is about to give you a bounce back and that bounce back will coincide with the unwinding of this carry trade temporarily?
A: Yes, just like with the markets there will be corrections. In other words, there will be situations where the US dollar rebounds and of course all the short sellers will be panicking. The dollar will go up further than what people expect. However, that will be a correction not a new trend. So I believe that there will be these situations as we go forward, but they will be temporary.
Q: What do you see between now and Q1 of 2010 because that is a tricky period. The Fed is saying is that don’t expect rate tightening anytime soon but a lot of people are saying that maybe in Q1 you will get the first signs of tightening of the loose monetary policy that will coincide with a lot of turbulence in the market?
A: Yes, as soon as we see any sign of inflation, there will be concerns. I believe that a more important aspect of this whole situation as regards to stock markets is that the pipeline for initial public offerings (IPOs) has now grown to very large proportions and this will tend to put a damp on the stock prices in every market. The IPOs up to now have been quite profitable for people who have gone in. On the average, they have made anywhere between 12% and 15%. So that is going to have a bigger impact on the markets than other concerns about inflation coming up.
Q: We are seeing a flood of IPOs being lined up from private companies and even the government even in India and China has had a spate of them as well. Are you saying that this could end up stifling the market?
A: This will have an impact on the market because you are talking about billions of dollars waiting to be raised. This is not only in the equity markets but also in the debt markets. When we go and talk to companies here in India and other parts of the world, invariably when we ask them if they are expecting to raise money, they say, “Yes, we think it is a good idea to raise money”, and then the second question we ask them is do they need this money and many of them answered, “No, we don’t need it. Our balance sheets are strong but just in case we want to have a stronger balance sheet and also we would like to do some purchasing of other companies, we would like to do some merger and acquisition (M&A)”. So, according to me, the trend will continue and till such time is the appetite for these IPOs wanes and we will begin to see some concerns, some of the IPOs have not been that successful. However, I think the lineup and the waiting line is very long.
Q: In India particularly many of the initial public offerings (IPOs) have not been successful at all. This 12-15% that you spoke about is probably one isolated instance, rest of them are all under water at this point of time. Do you think they are being aggressively priced?
A: Some of these IPOs are too aggressively priced. Particularly in the view our analysts have regarded the market. I am talking about the pessimistic view. So I think many of these IPOs are going to have to be re-priced as we go forward. We have seen a number of IPO prices come down even before they begin to think about going to the market.
Q: The counter argument to that is that this kind of supply of paper might actually lead to the market not blowing out as it did in the end of 2007. Maybe the secondary market prices will be somewhat more muted and not go into ballistic valuation range which is not bad.
A: I think it is a very good thing. This IPO activity has a tempering effect on the markets which is very positive. So I am certainly not against it. It does not mean that I am going to go after these IPOs that are expensively priced but definitely it is a tempering mechanism.
Q: The Indian government said that it will want to list many of the unlisted public sector units and may also do small stake sells in the existing ones. How do you read that from a market perspective?
A: These issues can be very big and India is not the only case. There are other cases around the world where government is thinking of listing some of the state owned enterprises. India is one of the biggest but China also is very big in that regard. So there is a long lineup. In the case of China, the government has been very cautious in allowing too many IPOs to come to the market. However, there are enough there to fill the pipeline. I believe we are going to see more and more of that as we go around the world and visit companies in Brazil and Russia so forth. In Russia the desire for IPOs is more important because they have big debt problems and they have to raise more money by either debt or equity. However, in case of India and China many of these companies don’t need that extra money.
Q: What is your call on emerging market equities now? Do you think it is conceivable that markets like India and other Asian markets actually go on to hit new lifetime highs sometime in 2010 or you would be more restrained in your optimism?
A: I am more on the optimistic side. I think you are going to see new highs as we go forward. I am not saying that is going to be next month, quarter or year, but as we go forward in this bullish environment, we will see new highs and the earning projections will be revised upwards. This will justify higher and higher prices. So I am quite optimistic in that regard which is why I think it is important for people to be invested and not to hold too much cash at this stage of the game.
If we look at the valuations, you will see we are more or less in the middle of the range in EMs. The low point was a price to book value about one time. The high point was about three times and now we are at two. That is at current valuations. As things get revised, the current valuation will come down and then there will be more upside to go through that three times book price level. There will be a point when euphoria overcomes any doubts and we will be entering a bubble environment. During this time, we will have to be very cautious.
Q: Are you saying that the next leg of the rise in the market will be driven by earnings growth and earnings revisions or will it also be accompanied by valuation expansion, this two times book moving slowly towards three times book?
A: It will be a combination of that. There will be valuation, expansion, asset values will be moving up and there will be earnings. On the back of that, there will earnings revisions upwards and then this supply of money and derivatives will give it that extra push. So there will be a combination of these factors that will tend to move prices up.
Q: What about something like India? Let us talk specifically about that because I note that in your EMs fund, India still has a much lower weightage than China, Brazil and Russia. Is it on account of your fundamental view on the market or is it because of valuations that India’s weightage is lower?
A: It is valuations. The valuations in India tend to be higher than valuations in China, Brazil, Russia and other countries. However, we still are investing. It is not a matter of exiting the market or anything like that. We are certainly not selling anything and we are adding but of course the amount of money coming into our funds is increasing every day. We are having net flows coming in. So we will be adding to India.
Q: Have you had positions in India in the telecom sector? Where do you stand on the large Indian telecom utilities?
A: We are generally down on telecoms not only on India but also globally because we are seeing that the competition has got so keen and has led the price of the service to come down dramatically. The government regulation is such that it is very difficult for these companies to increase their margins. It is looking for higher licensees in India here. The government is now auctioning 3G licenses and that is going to be very expensive. The leading companies cannot stay away from bidding on these licenses. So that is a further drain and it is not only in India but in other parts of the world the same phenomenon is taking place. We are seeing that the pricing is continuously being pushed down while the requirement for capital investment and license investment is increasing. So those margins are being squeezed and the trend more and more is towards the telecoms becoming lesser the growth industry and more the utility.
We will be looking for opportunities as we go forward because there will be a shake out. You are not going to be able to have five-six operators in one market. We think that three probably is the most that you can have even in a huge market like India. There will be side issues, smaller companies that nib along the edges and give very specialised services but three big companies that cover the entire country is what we see going forward. So this kind of a shake up is going to create some opportunities but currently we are not too keen on the telecoms.
Q: Do you see this as a transient phase though or do you think this period of pain and margins getting hit could be quite a protracted one given your global experience of the sector?
A: It will be somewhat protracted. Of course it depends over your timeframe, we are talking about a year or so, this kind of situation will continue. The opportunity is for mergers, acquisitions and so forth so that you have pure plays in the market and opportunity to re-price the service.
The other factor is technological. If 3.5G, 4G turns out to be what we expect or what we would like it to be then it is a new ballgame. Up till now 3G has been a very big disappointment. It has not delivered the promise that everyone was looking for. So the technology is going to be another big factor.
Q: What are your thoughts on the opportunity from power in India and whether energy and banking stocks are trading or coming at reasonable valuations?
A: If you look at our portfolios, when we talk about energy, it is the diversified oil companies. Those are the ones that are most interest to us. Preferably, those that are not subject to large amount of government regulation as regards to what price they have to charge or they charge for their products. If we move into the power sector in other words electric generation then you run into the problems of government regulation even more so and the utilities tend not to be a very good opportunity unless there are very special circumstances when there is a complete change in the regulatory environment and where the government becomes much more realistic in terms of what they allow companies to charge. This was the case by the way in Brazil a number of years ago when there was a sea change in government regulation and the attitudes of the government regulators and restructuring of the industry and there were some great opportunities for growth there.
In India, the government is very concerned about inflation and they are going to watch very carefully of what these utilities will charge. Therefore, we have to be very cautious and I would tend not to be very interested unless there is a change in the regulatory environment where companies can make long-term returns and can be rewarded for being more efficient in their operations.
Q: When do you think interest rates start hardening in India and what does it mean in the context of both equity market performance and particularly the banking sector here?
A: The Indian government is going to tighten sooner than others. I am not going to say it is happening overnight but we certainly will see that and I think we have seen some signals already from the government saying that if they see inflation moving up faster than they expect, they are going to begin tightening. When that is going to happen is anyone’s guess. That is true for any country. But a simple increase in interest rates will not necessarily dampen the market because as you know, we must look at the real rate, inflation and interest rates combined have to be studied very carefully.
Then we must look at what is happening in the market in terms of earnings. Therefore, I am not so concerned about increase in interest rates per se. I am concerned about the overall environment going forward and that is what we have to look at. If the government tomorrow announces interest rate hike, there will be a reaction in the market but that will probably be temporary.
Q: What do you think about the Chinese market performance versus the Indian market performance? China fell off a couple of months back quite sharply and then seems to be holding in the period of volatility that we are witnessing right now. Do you think China was the first market to correct and therefore has found an intermediate bottom, other markets are following it with a lag?
A: China seems to lead other markets. I am talking about the A grade market in China. The domestic market has tended to move up sooner and move down sooner. So it is in a way a kind of a leading indicator and it is understandable because in emerging markets China is now the major market and people look to that market for signs of what is going to happen going forward. So the Chinese market is leading. It is now stabilizing and probably getting ready for the next up-leg but the dampening factor will be this IPO activity.
Q: Your view on China is positive. Would that translate into a bullish view on commodities and underlying commodity stocks as well?
A: Most definitely, that is exactly the case. A lot of people focus on China and they look at it as consumption of various commodities make projections of what China is going to be consuming. Going forward, one must think about the per capita usage in India will definitely move up. If you compare India and China, you will see in almost every category per capita usage in India is far below that of China and it is going to move up. There is no question about that. So the demand for these commodities is going to be growing globally not only in China whether it will be India or Brazil or the other parts of the world particularly in emerging markets because if you have emerging markets growing on the average by 4% next year as what we are projecting, definitely there will be a surge in demand.
Q: In the next twelve months, how high are the other odds which hit a new market high in India?
A: The next twelve months it will be higher than it is now. It is difficult to state how much high it would be, but there will be a new high compared to where we have been in the recent past. However, it will take time first to go beyond the all time high. So we are looking at the markets very carefully. As we have stated earlier, we don’t want the market to go wild because that will not be good for anyone. We are looking for a steady growth based on solid earnings growth.
Q: You remain convinced though that this is a multiyear secular bull market in emerging market equities. Do you have any doubt on that score?
A: No doubt on that. The nice thing about these markets is that the bull markets last longer than the bear markets. The bull markets go up more than the bear markets go down. So we are in pretty good shape.