Speaking to CNBC-TV18 Mark Mobius of Templeton EM Group said that purpose behind demonetisation move is noble. But this is not the way to go about it, he said, as the big corrupt guys will have got away. Mentioning how it has inconvenienced a lot of people, he said, his biggest worry now is it may hurt Narendra Modi’s chances at elections in November. His party may be hurt, he said, saying the PM’s efforts at reforms, otherwise, are very good.
The pain from this cash cleanup will be over by year end, he said. People will have adjusted by that time. He believes GDP will be down by half a percent. The inflation picture isn’t that dire, he said, adding that India could afford another rate cut, despite what is happening in the US.
India has seen one of the highest growth rates in the world, he said, adding that if India could build its infrastructure, it could be good for the economy.
The influx of money into banks means they could accelerate lending for investment.
He would be looking at the IT sector which has been hit too hard. Since NBFCs have had their run, he would be eyeing state banks and some big private banks.We are looking at 15 percent or more returns for equity investors, he said.Below is the verbatim transcript of Mark Mobius’ interview to Latha Venkatesh.
Q: Demonetisation. Everybody is calling it a near term pain for long-term gain. Is that your view?
A: The purpose is very noble. They want to attack corruption and that is fine. I am afraid this is not the way to do it because the big fish usually know what is coming and they can get away and as you know if you look at all the ways that people are getting around this, you will find that it is not going to be that affected at the end of the day and of course there is inconvenience to a lot of small shopkeepers and other people. So, it is really unfortunate that they took this route.
I think it would have been better to take another route to attack corruption. But in any case it is done and it will have an impact on economic growth and maybe half a percent less than what you would expect and of course it will tie up businesses for quite a while now, at least until the end of the year. So at the end of the day it is unfortunate that it happened. My big worry is that it may hurt Modi's election in November, his party maybe hurt as a result of that. But let us hope that does not happen because we believe the Modi government's efforts at reform are very good.
Q: How many quarters do you think growth could take a beating? Is it just this quarter, is it this and next or even longer?
A: It will be this quarter and then by the end of the year it will be over. I believe people will have adjusted by that time.
Q: There are people who believe that consumption was the only part of the Indian story which was playing out well, not investment and that has taken a hit and it could result in job losses at the lower level till confidence comes back. So, how much would you shave off from gross domestic product (GDP) growth or from earnings growth for that matter?
A: I would say half a percent is probably what we will see because it is not going to last very long as we just noticed. It would be one quarter and overall it would be about half a percent.
Q: What do you expect would be the fallout in terms of inflation and interest rates? Let us assume out of the Rs 14 trillion that is being changed about Rs 4 trillion doesn't come because it was tax evaded money. Will that mean a big crunching of aggregate demand; are you seeing a big fall in interest rates next year?
A: I am seeing a fall in interest rates mainly because the Modi government wants that to happen, they want lower interest rates and I believe the inflation picture is not that dire. Inflation is pretty steady and they could afford another interest rate cut. So, we are seeing that longer term despite what is happening in the US. Of course in the US we are seeing better growth, higher interest rates of the Fed but I don't think that is going to have a big impact on the direction of where India is going both in terms of both inflation and interest rates.
Q: If you are pencilling only one interest rate cut you don't see a very big consumption - the expectation was that it would be an interest rate cut led consumption improvement next year. You are not buying that?
A: No, I am buying that. There is going to be improvement next year; better consumption, lower interest rates and of course these two are aligned, one will affect the other and I believe that the prime rate has to come down. We are looking of course at the repo rate but if you look at the gap between the prime rate and repo rate, it is much too wide. The prime rate has to come down.
Q: Coming to the other angle which a lot of people are exploring, as I was saying about Rs 14.5 trillion are going to be changed and it is expected that probably four or three of five trillion will not come back, some people are expecting that that would enable the RBI to give a large dividend to the government and therefore a big fiscal stimulus on its way next year. One, are you buying that argument and second, what will be the implication as a stock picker?
A: Yes, I am buying that argument and it will be very positive going forward for the economy, if the government is able to effectively invest in infrastructure and accelerate all the infrastructure projects. This would be very good for the economy. However, as you know this is one of the big barriers that India faces in terms of growth, to accelerate growth. Mind you growth rates in India are very good among the highest in the world but they can even go higher with better infrastructure.
Q: Do you expect this move to result in some kind of fiscal surplus next year as the informal economy gets formalised or for whatever reasons people are too scared now to jump taxes?
A: I think that could be on the margin but I do not think this will be a huge factor because the government will want to get that money out into the economy. So they would want to not have a big surplus and get that money spent. The other factor here by the way is the influx of money going into the banks means as Mr Modi has already mentioned that the bank should be able to accelerate the lending for investments. So that is another factor which we should be aware of.
Q: We have to discuss the Trump election but before that purely because of demonetisation, the expected rate cut, the expected fiscal stimulus. How would you change your views as an investor? Which kind of stocks would you prefer?
A: I think we have to look at banks first of all because the spread that they are having right now becomes very profitable for the banks. And the IT sector has been hit to hard, the prices have come down too much and there is an opportunity there as well and of course at the end of the day any consumer oriented stocks are interesting.
Q: When you say banks, actually the stocks that ran this year were the non bank finance companies (NBFCs), so bank is really large. There are the public sectors banks which could get recapitalise push if that extra money is available to the government. There are the private sector banks which largely are out of infrastructure then of course the NBFCs. Which leg are you now positive on?
A: I would say since these NBFCs have had their run, now it's time to look at some of the big banks, state owned banks and the other big private banks.Q: Let's start with Trump. At the moment we are seeing some money being pulled out of EMs. Do you think that this is going to accelerate as President Elect Trump takes over and becomes President Trump?
A: I do not think it is going to accelerate. We have come down roughly about 6 percent in terms of money drawn out from emerging markets. It is very similar to what happened around the Brexit time. It was a time of uncertainty. I think that money is going to be coming back for a number of reasons, but first of all Trump stands for growth; growth of the US economy, so we expect growth in the US to accelerate. Second, I do not believe that the US dollar is going to remain strong for very long. I think Trump's interest will be to have a weaker dollar so that US industries can export more. This is another area we have to watch carefully. Even though interest rates in America will rise, this is a situation which will be very interesting for the world because with the growing US economy there will be a lot more money to be invested overseas including emerging markets.
Q: I know you wouldn't want to take a bet on the point of the currency but we have seen the dollar in a one-way street. It's now 14 year high, if I only look at the dollar index at close to 102. You think that it is peaking out and 2017 will see the dollar below 100?
A: I think so. I don't know about below and 100 but I do not think it is going to go very much higher than we have now because Trump does not want that to happen. He will want dollar that is competitive and of course all the talk about country's manipulating their currencies is coming to the fore in his administration and there will be a very close look at where the dollar stands in relation to other countries.
Q: As you pointed out that Trump is seen the President for growth and the narrative appears to be that he is going to invest in infrastructure. Will that therefore change your pecking order in emerging markets? Will it be more pro commodity producing emerging markets?
A: There is no question that commodities will be helped by the big infrastructure spending in the US but we not buy that much because if look at the totality of consumption of commodities globally, China still is the king; they are the biggest consumer. The US can increase but it will not have a very big-big impact the way that China has had in the last ten years.
Q: Let's finish the Trump argument. Very recently in the past few hours and days, President Elect Trump has made statements about stricter immigration rules and H1B visas on which the Indian IT sector depends so much but there are some people who think that the banking sector globally will do well under Trump because of his pro growth policies and therefore IT could do well. Are you an IT buyer at this juncture, do you think Indian IT is at attractive levels?
A: I think the IT sector in India has been beaten down quite a lot and provides an opportunity to buy. I think Trump's policies will not have a big impact on the IT sector like manufacturing; exporters from India might have and by the way the whole trade policy is up for grabs.
One of the interesting aspects of the Trump administration is that there will be a lot more emphasis on bargaining at the individual country level. It will be a deemphasise of multilateral agreements and an emphasis on bilateral agreements which can be good for countries like India and others who have special needs, special requirements, they can sit down with Trump administration and reach agreement on number of issues and that would include IT and other areas.
Q: Coming on to China. Are you looking at China to destabilise world economy anytime in 2017 like we saw in January of 2016 or will China be a growth factor. What is the China impact on emerging markets and on global markets?
A: China continues to grow at a very high rate and for an economy of that size if you take a number whether it will be 5-6 or 7 percent, there is a lot of debate about the actual growth rate, but even at those levels, lower levels that they were in 2010 for example, the amount of dollars being spent in the China economy is much greater than it was in 2010 and in previous years. So China will still become and will continue to be a growth factor for Asia in particular and other countries around the world. As you know China is putting a lot of money outside. There has been a rush to get rid of renminbi (RMB); RMB has been getting weaker against the US dollar and Chinese investors are putting their money overseas, converting them into assets and converting them into US dollars and other currencies. So that will continue for a while but it is probably peaking at this stage.
Q: Putting all together for Indian investors, in the first place we have lost about 12 percent from the highs that we touched nearly 9,000 levels. We are now sitting sub-8000. Do you think the Indian market can go down further on a mix of Trump and demonetisation and what have you?
A: I do not think so. I think we have more or less reached the bottom and we will probably see recovery in the Indian market. However, remember that US market is now surging ahead and the US market leads other markets and we believe there is some correlation between what happens in the US and other countries - with more and more money being made in the US market, of course fund managers and other investors will want to balance their portfolio with emerging markets investments including India.
Q: What will you add to in India given the scenario you have painted for us in terms of fiscal stimulus, interest rate cuts, Trump's policies and Chinese growth numbers? Which are the additional sectors that you will incrementally add to in India?
A: We are particularly focused on and very interested in is the smaller areas, smaller company areas, small and medium size industries that are in the consumer area, in specialised manufacturing, in pharmaceuticals, in many of these other industries which have been pretty much overlooked and now it's time to start looking at those because very exciting things are happening in these companies.
Q: You, earlier in the conversation, mentioned banks. Would you get into incrementally on State Bank of India (SBI) or Punjab National Bank (PNB) among the macros probably because they benefit from fiscal and monetary stimulus?
A: Exactly. There is money pouring into these banks and the spread that they are enjoying should be very beneficial for the profitability. So yes, we look at those banks and others in the economy.
Q: What about the consumption stories. We did have the likes of Asian Paints or HDFC Bank that services consumption or a bunch of NBFCs like Bajaj Finance, which serve consumption. How do you play the consumption theme? Would there be consumer companies, would there be consumer financers. What you like in that space?
A: I think consumer finance has gone too far at this stage of the game. So I would prefer to go to medium and small consumer plays; companies that are producing products that people want and will be buying at the supermarkets and other retail outlets. Of course, we must now overlook the online surge that is taking place in India and globally and many of these online sellers will be very interesting going forward because there will be many failures but if we can pick the winners, it will be very profitable.
Q: Will you play the investment theme, the L&Ts of the world because of the fiscal stimulus expectation?
A: Yes, if you look at the fiscal stimulus and the infrastructure spending. It will be very interesting to go into some of the construction plays. Of course the problem and this is not only a problem with India but globally, going to construction companies carries many-many risks because of the kind of business they are running and the extracurricular activities they have to engage in in order to get contracts etc. So we have to very careful but if we can find the right companies in infrastructure - that would be very good.
Q: Let's talk about the big oil and gas sector. Does that hold any attraction to you? They were the 2015 plays, they haven't done much in 2016 but is there any interest, interest all the way from Reliance to state owned BPCLs and the ONGCs, anything that interest you in that space?
A: Yes, there has been quite a recovery in oil prices even though we still at very low levels. I still think that we might reach USD 60 per bbl globally but that remains to be seen. At these prices it is very iffy if companies engaged in very expensive offshore drilling or any kind of high value, deep sea or deep well drilling. So I would be very careful in this area and emphasise companies that are diversified particularly those who have a retail base because many of these oil companies are consumer plays rather than pure oil and gas. So that is the way I would play it.
Q: 2016 has given perhaps only 10 percent gains at an index level for equity investor but probably given 30-40 percent returns for a bond investor in India. What will be the mix in 2017? How much can an equity investor gain?
A: I think we can do better than 10 percent going forward because what my expectation is with regards to what is going to happen in the US and how that will affect the global economy. So we are looking at, maybe 15 percent or more returns if we play it right.
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