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Indian IPOs over-priced: Mark Mobius

Published on Fri, Nov 06, 2009 at 11:11 | Source : Moneycontrol.com

Updated at Mon, Nov 09, 2009 at 15:59

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The recent correction seen in the stock market is 'usual' and one should not be alarmed by it, according to Mark Mobius, Managing Director of Templeton Asset Management.

In an interview to CNBC-TV18, the legendary fund manager, considered an expert on emerging markets (EMs), said, "In this bull market, we will have some very severe and violent corrections. This is expected after such a rapid run-up in the markets."

Stock markets across the world, especially in EMs, have rallied in the past six months with the Indian market having almost doubled since March and Mobius said he wouldn't be surprised to see a 20% correction.

"That is not something we should be alarmed about," he said. "We are definitely in a secular bull market as long as the money supply continues to grow, as long as derivatives continue to be used and that market ofcourse is growing, you are going to see a lot more liquidity in the markets."

'See deeper cut, further rebound'

Mobius was of the view that the market could also head for a further cut as it goes up ahead because of valuation concerns but would rebound quickly if it happened. "You must remember a number of analysts have not been too optimistic about earnings for next year. These analysts will say: we are at the peak and it is about time we get out of the expensive stocks," he stated. "Of course, what will then happen is that they will realize that in fact that next year and the year after would be much better than expected and then the market would rebound."

'Dollar carry trade alive and well'

On the much-debated issue of whether the dollar carry trade (a practice in which investors borrow dollars at near 0% rates in US to invest in higher-yielding markets globally) could come to an end, resulting in a stock market crash, Mobius said it (the dollar carry trade) would continue.

Renowned economist Nouriel Roubini had warned that the moment the US Federal Reserve hiked interest rates in the US, it would strengthen the dollar, which would effectively result in a stock market crash.

"The US dollar carry trade is alive and well and will continue," Mobius said. "If you study what happened with the yen carry trade (a similar phenomenon that started in the mid-90s), you will realize that that went on a lot longer than people expected," he said, adding that the signals were that US Fed won't hike 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."

EMs offer value

Mobius said he was optimistic on EMs, which may reach their all-time highs going forward because of an increase in projected earnings, "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".

Valuations in such countries, he said, were in the median: neither under-priced nor over-priced. "There will of course be a point when euphoria overcomes any doubts and we will be entering a bubble environment. That is the time when we are going to have to be very cautious."

India IPOs over-priced

On the slew of initial public offers (IPOs) seen in India, Mobius said many of them were "much too aggressively priced". "Many of these IPOs are going to have to be repriced as we go forward. That is already happening; we have seen a number of IPO prices come down even before they begin to think about going to the market," he said.

The IPO party would, however, help in reining in the secondary stock market from going to bubble valuations because the excess supply of paper absorbs capital. "This IPO activity has a tempering effect on the markets which is very positive," he said. "I am certainly not against IPOs. That doesn't mean I am going to go after these IPOs that are expensively priced."

Read the full transcript of the Mark Mobius interview here