Monday, April 4, 2011

No investor can ignore India: Mark Mobius

Published on Fri, Apr 01, 2011 at 21:19 | Updated at Sun, Apr 03, 2011 at 18:32 | Source : CNBC-TV18
Here is a verbatim transcript of the exclusive interview with Mark Mobius on CNBC-TV18. Also watch the accompanying videos.
Q: We have got USD 2 billion in the last ten days, what's turned the mood around for India?
A: People have realised that they have got to be in India. India is a growing market. This year we are expecting 8% growth in real terms. There is no way that anyone investing in this world today is going to ignore India. Ofcourse the fact that Warren Buffet has arrived also gives you an idea that the interest is widening throughout the world.
Q: What has changed between the start of the year, when most global investors seem to be in a rush to get money out of this market and now where we seem to be seeing some degree of inflows once again?
A: We must remember that India was outperforming last year and there is always a phenomenon of profit taking. People deciding that they have made some money, want to get some money out and they look for an excuse to do so. In this case, it was these telecom scandals that were very heavily promoted around the world and this is what gave people an incentive and excuse to say look let’s take some profits off the table.
In addition to that fact, ofcourse you have had the Japan earthquake and the Middle East which added some uncertainty. But these were actually not as important because more and more investors are beginning to realise that they have got to diversify away from US dollar and US treasuries. So, a combination of factors coincided with this trend. But I believe now the investors will be back.
Q: That was my next question to you because since the start of the year it was quite distinct this trade, which was going on, which was people getting into developed markets and shunning or going underweight on emerging markets, do you think that trade is beginning to reverse? Has that trade played out fully?
A: Yes, it’s pretty well played out from what I can see. Ofcourse the US market had underperformed for so long. People saw an opportunity, they had some recovery in the US market. But if you look at the long-term trend, emerging markets will outperform developed markets by a wide margin. People are aware that you can’t have a situation where a country growing at 2% is outperforming a country that's growing at less than 8%. And that's a situation you have between emerging and developed countries.
Q: What's leading to the money coming out of developed markets to emerging markets? Is it more of a chasing of growth in emerging markets or realisation that growth will falter as we go deeper into the year into the developed market space?
A: Don’t forget now money is not necessarily coming out from one area and going into another. It’s a matter of degree because the total money supply globally is increasing. So, you are seeing an inflow not only in developed countries, but also in emerging countries. The flows into emerging market funds are increasing, not decreasing. So, now it’s a matter of allocation within these different markets. That’s really what drives the situation. There will be leads and lags between one area and another. But the overall pie is getting bigger because money supply has increased dramatically in all countries around the world.
Q: Do you think some money is beginning to come out of the bond market, the fixed income market as well into equities now?
A: That is one factor. But as I say, we are not seeing a big outflow out of the fixed income area either. Let’s say people have been putting money into the bond markets, they are staying there, but they will go into the equity now because the total amount coming at them is increasing. So, I believe you are going to see growth in equities faster than fixed income perhaps. But that doesn’t mean there will be an abandonment of the fixed income area because people make quite a lot money in the fixed income area.
Q: Any fears of contraction in global liquidity that you see in the second half or the later half of 2011 because of any reason, either of maybe a feeling that there will be no QE3 or because interest rates might start heading up in the West? Do you see any of these events having some kind of a contractionary effect in global liquidity?
A: All those factors will be important and will be part of the mix. I would say a higher interest rate definitely will have the impact because people will sit back and say, “Look, what am I getting in the bank and what is the expected yield on stocks.” If there is a big difference, particularly in real terms then there will be a tendency to hold off on buying more stocks. But there is no guarantee that interest rates will rise to that level where they will outpace returns on stocks. If you look at the average price earnings ratio now, let’s say for some of the frontier markets it’s ten times, that means that you need to have a very high yield in order to get people away from the stocks.
Q: You spoke about a few of the factors, which led to India's underperformance at the start of the year. In your mind, what was the key determinant? Was it the news flow regarding the scams etc? Was it the price of crude, which had short up because of the Middle Eastern conflict or was it just a high interest rate inflation situation, which made people skeptical of this market?
A: I would say there were two factors. Probably the most important in the short-term were the scams, the publicity surrounding scams. But underlying this was the rise in interest rates. Investors were quite concerned that if interest rates kept on going up then stocks would be less attractive. So, those two factors were probably the most important.
Q: Has that scare abated because inflation still remains elevated as does the price of crude?
A: Yes, of course, there is a concern that interest rates will go even higher because the Government of India has been very aggressive in tacking inflation. Over the longer term, however, we expect interest rates will probably come down because in order to grow this country needs a low interest rates.
Q: What about crude, for many global investors India is not the market of preference, when crude goes up beyond USD 115-120 per barrel, is that a big swing factor or a trigger in your eyes at all?
A: Not as biggest people might imagine because the Indian rupee, the currency, has gone stronger. Crude is priced in US dollar, so in rupee terms the price has not gone up as much. That's one factor.
The other factor is that you must remember per capita income has been rising here. So, people can tolerate higher prices to some degree. The lower income segments of the population where food inflation is very important and it can have a very critical impact on their lives, particularly if they are unemployed, in that case, I believe that the programme the government has instituted to have a national identity numbers so that the distribution of subsidies could be more efficient will go long way towards ameliorating that problem.
Q: We have had a 10% rally in the month of March. Post that rally, how does India look relatively, compared to the other emerging markets that you track?
A: I would say it looks quite attractive and we continue to hold shares here and buy more. So we are finding some bargains here.
Q: You think valuations in large caps are still attractive?
A: Yes, certainly the largecap stocks are very interestingly not as expensive as you had imagined. They are quite attractive. As you know, India has a wide swath of small and medium type companies with good earnings, good managements and good growth prospects. So that’s an area that we want to investigate further.
Q: Have you been deploying the money in the Indian broader market, the midcaps and smallcaps which have really underperformed off late, it’s not done really as the largecap names?

A: Yes, we have been putting more money in the smallcap. In fact, we have two new funds - an Asian smallcap and a global smallcap fund. Lot assets from India are going into those funds.( That is the change in stance by Mark Mobious,viz: from Largecap to mid and small cap.)
Q: Any sense you can give us, from which kind of sectors you have been picking those names in the midcaps and small caps?
A: The biggest arena for us is the consumer area. We are finding that the consumer stocks are very attractive. Not only because of the growth prospective, but because they are selling at valuations which are lower than you would find those largecap names in that sector.
Q: Let me just ask you about liquidity. Where is this new money shift coming in from? Is it the Exchange Trade Funds (ETFs), which you are putting in more money now in emerging markets after a higher hiatus or you think global funds are now beginning to reallocate a little bit in favour of emerging markets again?
A: In our actively managed funds, we are still seeing good flows. ETFs of course, have had tremendous growth, but I think people are beginning to wake up to the reality that the ETFs are often not what they are cracked up to be. For example, many people expect ETFs to follow the index perfectly and of course that does not happen, because there is a cost involved with these ETFs. In addition, very often as they get larger, it is more difficult for them to track an index, in the real sense of the world of buying and selling the stocks of the index. So I believe that there will be a leveling off of ETFs going forward. They will still grow, but they won’t be growing at the rate they have in the past.

Q: Is it emerging market
funds per se which are getting more attention in capital flows or are these country dedicated funds where most of the interest in the last couple of weeks has been seen?
A: I would say its global funds, its country funds, US, major countries and emerging markets, its all categories. When you get into more specific smaller countries, smaller sectors, then it gets more problematical, the size of those funds does not get very big.
Q: In the BRICs Universe, what is your order of preference right now given where the price of commodities are and what kind of relative stock price performance you have seen already this year?
A: These commodity prices are sort of a lagging indicator in the sense that companies that are going to benefit from a high commodity prices have already moved up. They move ahead of what’s happening in the market. So I would say that you are going to see a continuation of strong performance growth if commodities moving up, but it won't be spectacular, you would see the kind of moves that we have seen in 2009 when the prices really moved up at a very fast pace.
Q: Any concerns of a correction in that space? Copper has looked a bit wobbly these last few days, any concerns you have that some of these might actually pull down now?
A: We are aware that these commodities are quite volatile. They will slowdown at the drop of a hat, 10% - 15% - 20% is nothing these days in these markets and you can’t really anticipate that and if you try to act upon it, probably too late. So we take the long term view. We know the trend is moving upwards and we want to be in these stocks, of course if there is a big correction, we will take an opportunity to buy more but it will be impossible to time investments in that space so we have to look at it from a long term point of view.
Q: Do you have a view on gold?
A: Yes, the trend is definitely up. I won’t be able to tell you what's going to happen tomorrow or next week but I know that the longer term trend is up, definitely.
Q: How are you reading the Middle Eastern situation? Because that seemed like potentially a big problem, global problem just a few weeks back. Subsequently things seem to have eased out a bit though the price of crude remains quite elevated. How much of an impact could that have on global equities?
A: The general situation in Middle East in my view is quite positive because you are getting reform. You are getting recognition that there is a need for change. Of course it’s precipitated as a result of high unemployment among educated people as well as food inflation and that exacerbates the whole situation. But I would say generally speaking it’s a positive trend that’s moving through Arab countries, there is a sense of fellowship among these Arab countries and I believe that it is generally a positive trend.
Q: You do not belong to the camp which has those alarmist views that crude might shoot up to USD 150 to USD 200 and that might derail global growth?
A: You must remember that there are lots of alternatives now. It’s not like the previous oil crisis. We now have gas, solar and even nuclear even. Although you had this accident in Japan, you are still going to get lots of alternatives coming into play.

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