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The Indian market is showing signs of bounceback after going through days of correction. Sensex, Nifty have collectively gained around 600 points from their previous lows, setting the course for a rally ahead.
It raises questions on how many legs the bull market is left with. Mark Mobius of Templeton EM Group believes that we are in the mid-way of the bull market. In fact, it has the potential to move 20 percent higher than levels seen in 2007, he told CNBC-TV18 in an interview.
What has worked for India? Mobius highlights that a lot of changes have been brought in by internet and technology. This is having a big impact on companies, he told the channel. Comparing that with China, he said India is a close second option and the weightage on India is much higher in terms of portfolio.
Among key risks for the market, he points out to North Korean tensions and commodities, among others.
While he believes that the current government’s political changes will stand them in good stead ahead, North Korea could be a pain point.
“We could have a situation where the US shoots down one of their missiles any time. That kind of an event will have a global impact,” he said, adding that for India though it won’t see a very big impact. Lot of domestic activity is taking place and that is why Indian market may not be hit as much as Japan or other markets.
Additionally, higher commodity prices are also going to be a risk for India, he said. Few commodities have risen even if the com index is at the bottom… in fact, many commodities in India are not exported, like iron ore or coal, he said.
Going forward, he expects PSU banks to perform well and a shift to these segments. “The recapitalisation is making PSU banks look good for investment…as more money comes into the funds, money will be invested in these banks,” he told the channel.
Meanwhile, he has also shown some interest in the telecom space. Mobius told the channel that he met with the management of Reliance Industries to get an idea on how things are working out in the mobile business. He highlighted that in the future, more data is going to be pushed through pipes and use of that data will be huge in terms of medical, financial and social impact.
“In the hinterlands, they (companies) are leapfrogging and this is quite remarkable.”
Speaking on the humongous moves on cryptocurrencies such as Bitcoin, Mobius is of the opinion that it is in a bubble and prices will rationalize only when bigger plays invest in it. “There is a bubble brewing and that happens when everyone is euphoric. But the bubble will burst when funds start flowing into these,” he said.
Below is the verbatim transcript of the interview.
Anuj: Emerging markets have had a huge rally all through this year, India has been part of that. Do you reckon that it has legs to go?
A: Definitely. An interesting point you have mentioned about commodities, a lot of people have said well, if commodities are down, emerging markets cannot do well. Commodities are down and emerging markets are doing very well. So I think that is one of the mistakes that people make, they tie the performance of emerging markets to any particular variable. I will be worried about interest rates, they said that if interest rates in America go up, emerging markets will be in trouble. If you go back, 10 years, you will find there is very little consistent correlation – sometimes interest rates go up and the market goes up. Sometimes the opposite – you have this a very different behaviour and you cannot rely on that one variable but I think going forward, we are now midway through bull market which will continue into 2018, 2019.
Anuj: Midway through the bull market. a lot of you think we might be at the start of 2003-2007 kind of cycle, do you think it is different, we have already reached half way through that bull market?
A: No because if you look at the history, 2007 if you look at any of the emerging market indices, you will see, we are now below that high in 2007 and we could see about 20 percent excess above that 2007 high. So we have got a way to go.
Sonia: Generally when you come to India, you meet a lot of companies, have you managed to do that this time around and if yes, what has your takeaway been?
A: I have met one company and I hope to meet another one this afternoon. So I don’t have much time, unfortunately, I have to leave tomorrow but we have our analysts on the ground who are looking at many companies and the changes are quite remarkable mainly brought on by the internet and smart phones with technology that is being introduced into India by the mass of the Indian population is having a big impact on every company. Every company has to pay attention to what is happening at that space.
Sonia: So which is the company that you met?
A: I met Reliance not to do an in-depth analysis but just to get an idea of how things are going with business and with a 3G, 4G and all the other innovations that are taking place in that space. I have been a big fan for quite some time because when they were first laying the fibre, a lot of people were pessimistic and I was not because I believe that it was a very good plan that had long-term implications and we are now beginning to see that play out.
Sonia: Does telecom as a play interest you in India over the next two-three years?
A: Definitely, when you say telecom, it is now becoming datacoms in the sense that it is not only speaking on the phone but it is a tremendous amount of data is being pushed through these pipes and the use of that data is going to have to have tremendous implications in every field whether it be medical, financial, social, you just name it and we are in that situation where things are changing very rapidly. We are getting a situation where in the hinterlands, in the rural areas of India they are leapfrogging into the newest technology which is quite remarkable.
Anuj: Which is the other company that you plan to meet?
A: Not any public company. We are looking at private equity in a big way. So we are looking at private companies.
Anuj: Now, let us broaden the theme a bit, this morning you have been tweeting about China and specially the way China’s leadership is pursuing key reforms, is China a preferred market for you compared to India right now?
A: China is larger simply because it is larger in a sense that there are more companies that we can buy in China with larger market capitalisations but India is a close second, so no worries if you look at India’s relationship with China, India’s gross domestic product (GDP) about 20 percent of China’s but our weighting in the market is much higher than that in India because we believe that going forward India will be moving at a faster pace and will represent a larger and larger percent of relationship to China.
Anuj: The reason I brought that point is because in India, we have had a couple of key reforms, goods and services tax (GST) and a lot of people believed that it was a gutsy reform and there could be a price to pay politically for the Prime Minister in a couple of state elections. Would that be a bit of a set back? We are heading into elections season for India so could that be a bit of a speed breaker for our bull market?
A: Not really because we believe that the current administration in India has been very clever in implementing reforms with the understanding that they will continue to implement changes as they go. They made the choice that we are not going to get everything perfect and everything ready right now, but we are going to jump in because we have been waiting too long for these reforms and we are going to then have iterations installed as we see problems arise. So, this will stand them in good stead going forward because by the time the election comes along, they will have corrected a lot of the problems that people have faced with the new regulations.
Sonia: What is the biggest risk in your mind to this market? What will make you sit up and take notice? Will it be geopolitical tensions, something to do with North Korea?
A: Of course, with North Korea, anything can happen. Particularly now, with the American administration wanting to take some action in some direction. So, you might have a situation where the Americans shoot down one of North Koreas missiles and that creates a crisis. So you could have something like that at any time and we have got to be ready for that. And of course, it will have a global impact, not only on emerging markets, but everybody. The good news is that India has a path of its own in the sense that there is a lot of domestic activity taking place that is driving this tremendous growth and interest. So in some ways, India will not be impacted as much as Japan might be or some of the other countries in the world.
Sonia: So in that sense, does India stand out as one of your top emerging market ideas even through the course of 2018?
A: Yes, if you look at our portfolio, you should see India is right up there, usually a second to a third after China. So India is definitely up there and growing at a faster pace.
Anuj: A slightly unrelated topic here. What is happening with the world of cryptocurrencies and with Bitcoin in particular? And we are talking about huge market caps now. Is there a risk of some bit of money moving from the equities as an asset class to this new asset class which is now gaining traction and now it is getting listed on CME as well, so maybe getting recognised as well?
A: When people ask me to talk about cryptocurrencies, I always tell them I do not like to talk about religion in public. But in fact, I was telling a youngster who was trading in Bitcoin, I said Bitcoin is giving tulips a bad name. So, this is the problem that you have is that on the one side, you have a whole generation of youngsters who believe in internet, have been living the internet from their childhood and when they see a cryptocurrency, they think nothing of adopting it because they have been adopting other things on the internet. So I see a real need of course that cryptocurrencies are meeting and that is a way of rapidly transferring value across the internet without anyone knowing who you are and what you are doing. It is a real need and it does not have to be necessarily an illicit need although a lot of illicit transaction are taking place, but then you have got to separate that transmission to the value proposition. In other words, is it really valuable, is it worth something and that of course, is not the case. Bitcoins do not have that background.
Sonia: So you are saying we are in a bubble as far as the Bitcoin movement is concerned or is there still a lot of money to be made here?
A: There is a bubble growing. In fact today it went up again. There is no question. It is a bubble growing. But, you have wait, usually bull markets or bubbles end in euphoria when everybody is euphoric about the particular market you are talking about. And we have not reached that stage yet because people like us are kind of sceptical. It is when we start trading in this that is when you are going to see the bubble burst.
Anuj: Indian equity markets have seen a lot of domestic participation through the last one year and that is so refreshing for us to see so much domestic money getting into equities. We have withstood so much foreigner selling in secondary market at least. Your thoughts on whether this is likely to be the trend going forward that a lot of domestic savings will be channelled into equities and foreigners will slowly and surely take the money out and move into the other markets where they are getting better traction?
A: This happens very often and in many parts of the world you see that happening. The foreigners come in first and then they generate liquidity and there are new listings and new IPOs and then the local investors begin to get interested, they come in and they then begin to dominate the market. And foreigners say wait a minute, it is getting expensive, I am going to get out and take some profits. But very often they are wrong because the domestic investors continue to push up the market and the foreigners say why did I go out, I am getting back in again. So you are going to see this kind of trend in India as well because the domestic market is growing at a fast pace.
You must remember that more and more Indians are moving beyond this assistance phase. They have enough to eat, they have a house, they have enough clothing, they have education for their children and they have excess cash that they have to invest and that is where you are going to see a big increase. You see that in China and you are going to see that here. So as foreign investors, we have to pay attention to that because as I said, euphoria steps in, then there is probably good opportunities to buy.
Anuj: But do you see this foreign money returning? To be fair, it is getting invested primary markets, it is getting invested in qualified institutional placements (QIP) and block deals, but in listed secondary market, we have seen quite a bit of sell off. Do you that market coming back?
A: Yes, this is temporary. You must remember that as the Indian market grows, it is waiting in the indices\' increases. When that happens, about almost half of all fund money from overseas has to invest because they are indexing. The rise of the exchange traded funds (ETF) have been quite amazing, the way they have grown. Money, not pouring into funds around the world is mostly going into ETFs index funds. These index funds have to invest according to the index.
So as India's market cap increases, they will have to put more money in. so you are always going to have that. The other important point is that the degree to which the government is able to privatise more and more state-owned enterprises means that the market capitalisation of India will grow and they will take a bigger share of the index.
Sonia: What is your take on what is happening with the US with respect to that tax cuts bill and the kind of repercussions it could have on other economies as well?
A: This is having a big impact. If you think about the amount of money that will come back into the US, you must remember that you have examples of Apple talking about the savings, hundreds of millions of dollars of savings as a result of the tax bill of their overseas holdings because a lot of companies have billions of dollars outside America has not returned because of the high tax. Now with the having of the tax, they will bring that in, but it will not stay in America. That will of course, recapitalise some of the companies, but a lot of that money will flow back out again into investments.
Sonia: But do you see money move out of the emerging markets into the markets like the US?
A: Most of this money is not in emerging markets. It is in fixed income in developed countries, Europe, UK, like that. So it is not going to have an impact in emerging markets, from what I can see, of any great significance. There is some in emerging markets but not that much. So in some ways, it will be beneficial to emerging markets.
Anuj: Let us talk a bit more about India. For years, your biggest bet has been HDFC Bank and in your funds. In the private sector banks, private sector financials, they have dominated portfolio. Of course, they have dominated the index as well. Do you think that will remain the dominant theme as far as the Indian market is concerned?
A: I think there is going to be more of a shift towards state-owned banks because of the recapitalisation that is taking place, that the government is planning. That will make the state-owned banks look more attractive.
Anuj: So you are moving some money to the state-owned banks?
A: Yes, to the state-owned banks, more in that direction.
Anuj: But you do not think there is a belief that they will once again make the same mistakes and once again get into trouble?
A: They will. There is no question about that, but it is going to take about five years for that to happen. I know the government has said they have made banking reforms and it will not happen again, but you and I know that this is bound to happen that they will get careless again. But the good news is at least, once you recognise a problem which this government has, and have tried to do something to ameliorate it, to do something to correct the problem, that is a huge step in the right direction. So I believe, going forward it will not be as bad as what we have seen before.
And the degree to which the government is able to further sell shares of the state-owned enterprises, the banks, that will also help because one of the key themes nowadays is governance. We are under tremendous pressure from our clients who say we want you work on governance, we want you to work on the environment, we want you to work on social issues: Environmental, Social and Governance (ESG). So that is a big theme going forward and you are going to see foreign investors as well as domestic investors putting pressure on these companies and banks to behave themselves and not go overboard.
Sonia: So would we be looking at you putting fresh money into PSU banks or would it be moving money from private to PSU?
A: It will probably just be a natural growth. In other words, as we are growing, as more money comes into our funds, we will naturally put more money into the state banks.
Sonia: The other big theme that you played on is commodities, especially global commodities. Are you still looking at a surge in commodity prices and how would that correlate with what is happening with the Indian metal stocks?
A: You have already seen a surge in some prices. If you look at the commodity index, you will see it came down and now it is putting along at the bottom. But if you look at some individual commodities, they have spurted ahead. You must remember that when you are starting from a low base, the percentages can be tremendous. A lot of people do not realise that from the absolute bottom, oil prices have gone up 90 percent. If you look at palladium – one of my favourites is palladium because it is used as a catalytic converter for gasoline engines and of course China is still producing millions of gasoline engine cars – that commodity has gone through the roof.
It has really gone up. And certain other commodities like components for batteries, those commodities are going up a lot. So I believe that you are going to see recovery of commodities simply because the demand for commodities is not stopping. The demand continues. A good example is China. A lot of people say China is importing less iron ore. Yes, in value terms, it has gone down, but in quantity, it has gone up. If you look at the two charts, in value it is down and in quantity it is up, continue to go up, simply because the demand is still there.
Anuj: So is that a risk for India as well because we are a commodity consuming country. We import 90 percent of our oil requirement. That was a trigger for the last correction in India as well. So, is that a risk for India then?
A: It is a risk because if you have a big demand and you are going to have a growing demand with a growing country, at the rate you are growing, you are going to have demand for more commodities. The good news is that there are a lot of commodities in this country that are not exploited and degree to which the government can unleash some of those commodities could have a big impact on what is happening locally.
Sonia: So what would you be referring to? What kind of commodities?
A: Iron ore, think about it, you have got plenty of iron ore. You have got plenty of coal. I do not know how offshore oil and gas or onshore oil and gas you might have, but I am sure it is there. And there is probably a lot of undiscovered commodities that are in this country. It is a big country. There is a lot going on. So, the good news, by the way, is with the government's policy of giving more autonomy to the states, I believe the states will be more apt to explore for opportunities within their own states and unleash some of this potential.
Anuj: Two strong pillars of India's economy over the last decade had been IT and pharmaceuticals. We have seen a bit of problem for both these sectors though they have started to recover as well. Do you think the structural story is over in Indian IT or pharma or both or do you think it was just a temporary phase of weakness and these companies will be back to where they were about 3-4 years back?
A: The story with IT and pharma was that many other industries found it very difficult to export because of the restrictions. The good thing about the GST is that these restrictions will be released, it will be easier to transport out of the country and so forth. Someone told me that if you wanted to go from one state to another, the cost would be as much as shipping to Brazil, that sort of problem. So a lot of that has been ameliorated. And so, it was easy to go into the IT space because you were not transporting anything. You were just broadcasting around the world.
And the same thing with pharmaceuticals, very small, easy to ship, no big deal. So, in that sense, those industries will continue because they have a very strong position globally already and they are going to give that up. But in relationship to other industries, they probably, as a total, will be a small percent. But the other thing you have to remember is that the domestic demand is going to be increasing for both of those industries.
Disclaimer: Reliance Industries Ltd. is the sole beneficiary of Independent Media Trust which controls Network18 Media & Investments Ltd.
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