China's 6% growth is still enormous: Mark Mobius

In a CNBC-TV18 exclusive, Latha Venkatesh caught up with Mark Mobius of Templeton Emerging Market Group and began by asking him whether this rate cut by China means that the country is slowing down further.

Below is the verbatim transcript of Mark Mobius' interview with Latha Venkatesh on CNBC-TV18.Q: Since you came to India, since your previous visit, are you noticing any signs of growth?A: There is no question. There is growth, it is tremendous. I was in Chennai. I saw tremendous activity and change since I was there last and here in Hyderabad, the same thing. It is just amazing. Every time, there are new buildings, new hotels, beautiful new hotels and all kinds of activity.Q: Before I come to India and the growth story, the big event over the last few days has been the Chinese rate cut. That was both a reserve requirement and a interest rate cut. There are some who believe that probably things are worse in China than that 6.9 percent. Which is why they are doing so much. What is your reading of the rate cut?A: My reading is that it is the natural progression of what they set out to do when they promulgated a 10 point programme. In that programme they said we are going to liberalise the economy. We are going to make things oriented towards a market economy and we are going to liberalise the financial sector and they did. They started by saying look there is no regulation on lending rates for banks. Now, they have done the other side. And they said, this is a risky part, because we are liberalising the deposit rates. At the same time, they said, we are going to free up the reserve requirement for the banks which means the banks will be able to lend more. So, it is true. It looks like a effort to stimulate the economy. However you must remember, they have to be very careful, because if they are changing the lending rates and the deposit rates, there is a risk that the banks will lose, the spread will narrow and of course, they liberalised deposit taking because there are a lot of wealth management funds that have been taking in all these deposits at a higher rate than the banks have been offering. So, I really do not think it is designed to stimulate the economy. Of course, they would love to do that as well, but I think it is more a natural progression towards financial liberalisation.Q: So, we should not interpret this as a further slowing down of China?A: There is no question that China and the world has been slowing down. So, that is the reason why in Europe Draghi has said we are going to do more stimulus and that is why the Federal Reserve in the US has said maybe we should not hike rates right now.So, I think the globe looks like there is a slowdown going on. I don't think this is as bad as the economists may think because even if China is growing at 6 percent instead of seven, 6 percent is still enormous.Q: It is enormous but the events between June and August were catastrophic at least the events that came out of China. We saw this stock market volatility and we saw the devaluation and we saw some fairly bad purchasing managers' index (PMI) numbers and the whole world readjusted, commodity prices sees the further trough. Now we thought that was over and done with and the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD) and the World Bank had come with their new lower estimates. Now we have a second round of central bankers giving us negative vibes. The Federal Reserve pushes back an expected rate hike, Draghi says 1.1 trillion of bond buying is not enough and the Chinese cut reserve and rates so should we therefore prepare for a further downgrading of growth estimates by IMF, World Bank, OECD and therefore more mayhem?A: It is quite possible that you will see that and I think we have to wait till the beginning of next year to see where that stands. My feeling is that, that will not be the case. I think there is a fear there but the fear maybe unfounded. The reason why I say that, you must be remember that a lot of people worry about lower commodity prices but the reality is most of the world is benefited from lower commodity prices particularly the most populated countries in the world, India and China. India loves lower oil prices, so does China. So, the mood is probably going to change as we go into the next year.Q: The net result of the Chinese lower PMI numbers, was that money ran away from emerging markets, because China’s trading partners were seen as downgraded, commodity exporters were seen as, why seen, they were actually, Brazil and Russia were in big trouble. So, that explained why emerging market funds ran away from emerging markets. They returned. About two weeks back, we started seeing those flows. Will they reverse now after the Chinese action or do you think at the moment the flows will continue?A: They will stay and maybe even come back because this measure by the Chinese is going to stimulate the domestic market and that will attract - when markets look good and they begin to move up, that attracts more money. So, that is quite possible. Q: For the moment, do not wear your emerging markets hat, if you were a global fund manager, what would be your most attractive assets?A: I would say frankly, it sounds like I am writing my own book here, but emerging markets still look very good. And the reason why I say that is that they have come down so far. I mean you take a country like Brazil. Brazil is not going to disappear from the face of the earth and things are so cheap there, you have to start thinking maybe we should be looking at that. The same thing is true of Russia, of course, Russia is a different situation with the problems. India is growing at a very high rate. China is growing at a high rate. I mean it is very difficult to justify saying something like, oh you should be in Europe and forget about emerging markets or you should be in the US and forget about emerging markets. Of course, the difference in valuations now has widened in the sense that while the US companies have gotten more expensive, the emerging market companies have gotten cheaper. Q: Let me ask you to wear the hat you always wear as an emerging markets head fund manager. Which would be your preferred market, say top-three, top-five?A: Obviously India and China have got to be right at the top and then after that, I have to turn to the so-called frontier markets, because markets in Africa and some markets in Asia such as Vietnam are very attractive at this stage. By the way, in Asia, I just came back from Vietnam, I was really impressed by the changes that are taking place there.Q: I am obviously more tempted to ask you India questions, but a couple of more global questions – The Fed. We almost thought it was going to hike rates in September and that did not happen. Now, what is your sense, is it a 2015 hike at all?A: I think they are obligated to do something because they will lose credibility because they promised they will raise rates but, my thing is that they may even postpone it to the beginning of next year. But regardless, no one knows what the timing is going to be, but it will be a very small increase. It will not be a big increase.Q: You do not think that in the event the rate hike happens in December, there is once again chance that money flees emerging markets once again wobbling of currencies?A: The rate hike has already been discounted by the market. Everyone has assumed that will happen and everyone assumed what the impact would be on bond markets already. So, I do not think a rate hike provided that it is not an enormous one is going to have a big impact.Q: We also have been waiting for growth. The previous four earning seasons have disappointed us. What is your own sense as an India observer? Have we troughed out? Is this the growth giving earnings season?A: I think it is going to be. It is not going to happen quickly, but gradually you are going to see this happening. And the reason why I say that is the reforms that Narendra Modi wants to implement they take time. It is not going to happen overnight, but he is making progress and once that begins to kick in so to speak, companies will begin to do much better. Productivity will increase, to just give you one example, the tax system. If he is able to implement the national Value Added Tax, the efficiency of companies in India will be incredible, because you now have really almost like 29 countries.Q: That said, how important is the Bihar election for you? Will you see it as a referendum on the NDA government and Narendra Modi? If he were not to win that, will that deeply upset or somewhat change your growth forecast?A: Let us put it this way, it will be a disappointment. But I do not think it will change the fundamental direction in which we are moving. Because he is still in charge and he will be able to implement a number of things even if he does not have the support of Congress. So I think I would not be terribly disappointed, but I would be disappointed.Q: The problem is that he is hoping as he wins state after state that he will be able to get the majority in the upper house of parliament. So, Bihar's loss could mean postponing your majority. Will you at least stop incremental investments?A: No we will not stop because we continue to invest and there are many companies that are not totally dependent on these issues. To give you an example here in Hyderabad you have software companies that are really export oriented and will not be impacted, but, we are missing a lot if it does not happen.Q: That is a fair point and all of us are hoping that at least the goods and services tax (GST) gets implemented. But speaking of software companies, will that be one of your top sectors? If you were to discuss India sectorally, software used to be everyone's favourite, is it still a giant share of your investments?A: It still is. It is a giant share of our investment, because these companies continue to grow, they continue to expand their services and they have demonstrated they have become global companies not only Indian companies. So, it is very exciting.Q: But, Wipro just recently gave us a softer than expected guidance, other companies, even Tata Consultancy Services (TCS) has not quite lived up to the pace of growth that it delivered earlier. So, is it a smaller share of your say, Rs 100 of investments, has it declined software investments from Rs 30 to Rs 25?A: When the price declines, of course our rating declines as well. But if the price has declined enough, we just add on. We continue to buy in.Q: But normally software would be what, 10 percent, 20 percent? A: I would say of our Indian investments, it should be at least 20 percent, of our global funds. Of course you must remember, we have domestic funds and those funds go into a variety of industries. The other area that we are particularly excited about is anything to do with the consumer, because per capita consumption is going up and per capita income is going up and we want to be exposed to that.Q: When you say consumption, would you mean durable, would you mean air conditioners? We just had a couple of air conditioner companies posting excellent numbers. Or do you mean staples?A: Both. Staples and durables because households are being built, you are getting an expansion of apartments being purchased. They have to be equipped with refrigerators, washing machines, etc and once those people move in, they are going to be buying the modern food and the other equipments that they need.Q: I did not hear you say finance. Normally people would say that if India is a growth story, the proxy of the growth story is the financial sector. Are you not buying finance?A: We do have finance in our portfolio; we have some of the big banks in our portfolios, yes.Q: A lot is happening in the banking space. 11 licenses for what are called payment banks have been given, they can take deposits they cannot give loans and then there are eight licenses given to small banks and two more to universal banks, banks that can do everything have been licensed. How does that change your view of the legacy banks, the incumbent banks?A: This is a very key question because we have to watch the legacy banks to see how they adjust to this new challenge because it is a big challenge. With the internet, with the smartphones, smartphone companies would be able to apply for a license and begin doing transfers.Q: Four of them have been licensed.A: Well there you are, and that could take a lot of business away from the banks. So we have to see these banks step up to the challenge and establish their own internet friendly services.Q: Many of them are doing that but at the moment would you scale back some of your banking positions?A: Not yet, until we see how they are responding. I think they are going to respond. More importantly the banking sector is expanding in any case. An expansion of the payment services that you are going to see  could actually add more business to the banks. There are lot of people that don't have  bank accounts, once they start doing transfers they may say in order to continue this I may need a bank account. So, the pie will grow.Q: Do you also buy non-bank finance companies. They have been yarning for a licence but they haven’t got them.A: We have not gone into that yet but we are definitely looking at it.Q: Finally telecom - you spoke about them getting licences - the smartphone guys. Is that a sector that excites you? They paid a lot for spectrum.A: That is the problem. The problem with telecom companies is that they are spending a lot of money on spectrum and on capital investment. As soon as we see these companies reach their apex of capital investment and as soon as we see their cashflow more and more dependent  upon the expansion of the internet and data services then they would become more interesting.Q: Where do you see the Nifty say 12 months from now or 24 months from now? Is this a 10 percent growth story, is this a 15 percent growth story in the next 12 months?A: Usually market does double the growth rate. So, if the economy is growing at 7 percent then you could expect a 14 percent rise in the market. The problem of making that prediction is that the market isn’t going in a straight line, it goes up and down and lots of volatility. I would say if you took number of data points over that time period you would probably get to something like 14 percent.Q:  Do you think that not the index but chasing  you favourite growth stories might give you an even better take from India?A: Yes definitely because you are going to see that as an average. There you are going to see some companies really move up very rapidly, it could be internet companies for example that are doing really well, it could be some of these new finance companies. So, you could see some high volatility. Q: In the last 8 weeks it is the commodity guys who have come out of nowhere and performed. Is there more juice left, do you think the commodities have troughed out?A: I think a lot of these commodities are beginning to look that way. Just take oil for example. The average growth rate of consumption globally and production ranges between 1 or 2 percent over a 20 year period. Within each year it is may be a +/- 5 percent variation either way. However the volatility or the price is all over the place - 20 percent up, 30 percent down so forth and so on. So, you have got to consider that, its probably been overdone - pricing has been overdone and we are going to see a move to normalcy again towards a higher price.Q: So, you may buy commodity companies in India as well?A: Yes definitely. We have to look at the companies individually, are there corporate governance issues and other issues like that but definitely not only in India but other parts of the world we would be looking at that. Q: Wouldn't that logically mean that you won't expect commodity prices to soften even further in 2016?A: I don't see that. You will see some variations from time to time but we have reached a point now where so many of these commodities at these prices are not economical to produce. Therefore a lot of the producers are falling by the way side. They are saying I am cancelling this project, I am cancelling that project. If you look at the fracking in the US at USD 40 or USD 50 half of them or more are not making money. The rig count has come down dramatically. Of course production has not come down dramatically yet because lot of wells are still on the ground but going forward you will probably see it decline.Q: In that case would you really expect the Reserve Bank of India (RBI) governor to give many more rate cuts from here on?A: You must admire him, he is very intelligent expert person that has made the right decisions for a long time. Now with inflation coming down that gives him the opportunity to lower interest rates. I think he is a disciplined person and he will not do so unless he is absolutely sure that it is not going to harm the inflation picture.