Exclusive: US credit downgrade will lead to diversification, believes Mark Mobius

I think what it means is that investors around the world have got to start thinking about diversifying away from the US. I’m not necessarily saying you reduce the US. But at least think about diversifying as your assets increase, diversify more into international markets and particularly, emerging markets and more specifically India. This will cause investors to think that they can’t rely too heavily on the US market. Although the US market is still the biggest in the world and still very important but they’ve got to be diversified into other areas.

Whenever the world is in trouble, including in the US, the world goes back to take refuge in the dollar which is considered a safe haven. Do you see the dollar safe-haven trade reversing anytime soon?

Well, you must remember if you look at the US dollar index you see that it has come down since last year about 18 percent from the high point and now it’s down substantially which indicates that there has been a stronger alternative currencies like the Euro and the other currencies that are doing better than the US dollar. That’s another good reason for people to think about diversifying into other currencies. Now I know a lot of people say, oh! Emerging market currencies are always weak, which is not the case. Some emerging market currencies are actually doing quite well against the US dollar. So I think the downgrade will give a lot of investors pause for thought about what to do with the portfolio. a) Diversifying more into emerging markets, and b) Get into equities and out of fixed income.

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When a foreign investor comes to India, all these years they have been factoring in at a 3 to 6 percent depreciation in the rupee, that’s part of the equation. Do those assumptions change from here on?

You must remember that many of the companies in India are exporting in US dollars, in Euro and other currencies. So that offsets the problem with the rupee. So if you are earning in dollars or in Euro, and you’re paying in a falling rupee or weakening rupee your margins are getting better so you have to look at it from that point of view where a weaker currency is not necessarily a bad thing if you are investing in equities.

But when you invest in markets as a whole, you are investing more in domestically oriented businesses. And there are all kinds of institutional investors who come into India with the rupee depreciation assumption. Will those assumptions be revisited now?

I think it will be as India’s growth story begins to be more widely known and as the Indian rupee becomes more internationalized, you’ll see a change in attitude towards the rupee. Nevertheless even with this slow depreciation of the Indian rupee, the growth in companies and the growth of the index will more than offset that. So in US dollar terms, you'll be in good shape.

This year alone if you see the US markets have actually done much better than Indian markets for that matter any other emerging market. Indian markets are perhaps up about 8 percent or so this year till date, the S&P 500 is up about 50 percent and the Nasdaq about 40 percent plus. Do you think this divergence will get bridged over the rest of the year?

I think it will. I think more and more money is flowing into India and for that matter other emerging markets. You'll see a change and I think it'll get better against the US market.

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If there is a recovery in China, how do you see fund flows getting redirected? Do you think foreign portfolio flows to India can be buoyant even if the Chinese economy makes a comeback? Foreign investors have burnt their fingers in China in the past.

I don't think you can expect a big surge in money coming into China this year because it's going to take time for confidence to return among foreign investors because as you rightly pointed out they were badly burned in the Chinese market. But you must remember the Chinese market is not driven by foreign investors. Local investors are the one that really drive that economy and that market. Once the consumers in China regain confidence, you'll see the Chinese index go up and of course people that are investing globally will take notice of that and will probably pile in so you'll see sort of an accelerating impact, probably not until the end of this year and beginning of next year.

In your own mind, how do you see the allocations for India panning out, because at least in the past one year there has been a lot of volatility in terms of foreign flows? This year we have been very good especially since March April we have seen substantial foreign inflows. Now do you see inflow stabilising at higher levels from here on because there is more clarity on the sustainability of growth?

I think the inflows will increase. The government along with the individual state governments are doing their best to encourage investment. I believe more and more people globally are taking notice of India. Companies like Apple and others are going to be manufacturing more in India. So these inflows probably will increase.

Can you give us some sense of the kind of conversations you have with your own clients and investors across the world on how they are recognizing this change in India.

The big problem that India faces is size. When you talk to a big institutional client in America or Europe that are investing billions of dollars, they look at the Indian market and they say although it's a big country growing fast, the market is relatively smaller than what China is or was, and therefore, they have to take that into account. This is the reason why it'll be very important for India to increase the privatization of state-owned enterprises so that the size of the Indian market increases.

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Anything else they feel bullish about? Anything they feel nervous about?

Of course they're bullish about the facts that I mentioned. Population growth, technology and so forth but what they're usually concerned about is the currency. They worry about the currency devaluation and a weak Indian currency. I would say that’s the big concern and by the way it's a concern not only for India but other countries as well.

But you see that changing only slowly, isn't it?

Yes, it takes time.