has started his second innings with
Mobius Capital Partners
. In an interview
with Nikunj Dalmia of ET Now, at the Morningstar Investment conference, Mobius explains why he wants to put money in India, why India is a special case and doesn’t need rate hikes to contain inflation and how he is looking for companies that other than valuation, have strong balance sheets, focus on ESG factors and are paying dividends.
What brings you to India?
The Morningstar Conference, and also we are planning to put money into India because we have a new fund and it is taking more time. I hope, we will be able to accelerate that.
What gives you that confidence? Do you think that we are at the end of the pain when it comes to India?
Well we know there is a liquidity crisis, we know that you had this problem with the infrastructure company and all these issues are at play and therefore the market has gone down may be a little bit too far. The currency has gone down as well. Put this all together and it means there are bargains, there are good opportunities.
You have been making a call that one should always go and commit when bear markets are on. Do you think the current route of selling in emerging markets across categories is a buying opportunity?
Yes. We are at a stage where with interest rate going up in the US, currencies in emerging markets are going down dramatically and the markets themselves have gone down. It is an opportunity to start buying. I am not saying we are at the absolute bottom, no one can predict whether it is going to be 20%, 30% at the beginning of the year. Who knew emerging markets would go down by 20 odd percent and we are now about 22-23% on the index. The important thing to remember now is that some companies are bargains, tremendous opportunities but some are not. We now have to separate the men from the boys, so to speak.
You have to stay away from companies that have weak balance sheets, do not pay dividends and have poor management. Companies that have strong balance sheets, pay dividends and have a forward looking management are going to be the winners. Separate these two and do not pay so much attention to the overall index.
Emerging markets currently account for nearly 30% to 35% of the global market cap. That is a sizable chunk. It is no longer a billion dollar or a two billion dollar market. This 30% market cap now has corrected by 50% to 15%. So, even though emerging markets are supposed to be high growth pockets, why are these market correcting at a time when growth in general has been very precious?
It is mainly because of what has happened in the US. We must remember the biggest pool of money globally is in the US and so what US investors do, have a big impact. Of course, that impact is declining. As emerging markets grow internally, you are getting big pockets of money investing in the local markets. India, for example, has a big domestic market. But nevertheless, people look to the US and the US dollar. They trust the US dollar.
If interest rates are going up in the US, money flows in to the US dollar until interest rates in emerging countries catch up. Look at Europe, the euro is still paying almost zero per cent interest. That has got to come up. Once that comes up, you may see money flowing out of US and into emerging markets. By the way, you have already seen reversal. We have seen money going into emerging markets recently as a result of these developments.
You believe that crude could go up all the way to $100. That is like a double edged sword, which is not working in favour of India. Do you think if crude were to move up higher and get to $100 per barrel, the whole India investment hypothesis will change?
No, not really We must remember India is a big country. There are lot of things going on where oil prices may not impact. For example, you have got huge coal resources. Agreed coal is polluting but the reality is that when people want to produce fuel, then coal becomes a big factor. You have increased your solar. You have increased your wind. So yes, oil does have an impact but it does not have to be disastrous and it depends again on the industry. In some industries, power consumption is not a big factor, it is very small part of their total cost.
Where do you find tactical opportunities when it comes to India? A year back. it was financials, but look what is happening with financials right now. Just about everyone is shunning even quality NBFCs. Is that the right pocket to hunt now?
There are going to be opportunities. You would think micro lending and the non-banking institutions would be dangerous but there are opportunities in this sector and we are looking at that very carefully.
COMMODITIES WILL CONTINUE TO BE A BIG FACTOR
In your previous avatar you have bought stocks like Reliance. You have bought nearly 5-7% in Sesa Goa. What is your view on commodities first and then commodity stocks as we stare at a trade war and a potential slowdown in China?
Commodities will continue to be a big factor. Just take your oil. Companies that are producing oil are going to be doing very well with the higher oil price. I always tell people do not give up on commodities because commodities are required and in increasing quantities. We must remember that two most populated countries in the world India and China are going to use more and more commodities. It is going to be a big challenge because there are environmental problems with commodities as you know. I do not think commodities are not going to get cheap. They are going to get more expensive.
Parallels are being drawn between 2008 and 2018, looking at the quantum of the selloff. If one works with an assumption that the US economy will start slowing down in 12 to 18 months after the sugar rush which they are enjoying because of tax cuts, how do you see the flow of money moving and changing?
You will see flow out of the US increasing because as you reach these higher interest rates, that will come to an end. There will be a point when inflation will not come up at the rate they are expecting it to. This is one of my big theses these days –we are not in an inflationary environment globally, we are in a deflationary environment. Why? Because of technology. Technology is making things cheaper. The CPI is based on a basket of goods which are changing. But if you look at the basics, the food prices are going down. The World Health Organisation is looking at these prices and they seeing a declining trend. We are in that kind of environment which I believe will hold up the rise of interest rates by central banks but as the US central bank slows down interest rate hikes, other banks around the world have to catch up because they have not yet risen as much as they should. So, you are going to see money flowing back to take advantage of these higher rates.
In that sense would you say the Reserve Bank of India has been a little behind the curve because just about everyone on the Street was expecting it to be a 50 bps hike but they chose to hold back.
In the case of India, I am a little bit on the other side of the equation because I think in India, the central bank has been in the past too aggressive about raising rates. It would be better in the Indian environment to have lower rates because it will help the community at large and industry at large. India is kind of a special case, It is not necessary to raise rates in order to contain inflation. If you want to contain inflation, you have to increase productivity and that means you have to reduce the regulatory environment.
The single excise tax or GST is a giant step in the right direction because that has the impact of lowering inflation, reducing overall cost. I think India is a special case.
When you think of India, you think of consumption. Consumption is just such a large basket. Just about everything falls under the bracket. Take autos. In the market correction, auto stocks fell down.Do you believe it is the time to buy this decline in autos because whenever the economy recovers a little bit, the auto stocks will come back?
It is now time to look at companies that are advanced in electric automobiles because that is the future and not only for the domestic market but for exports. So the degree to which Tata Motors or any of these companies can develop an inexpensive electric vehicle will be very important going forward. That is what I would focus on. And the technology is here, there is no reason why this cannot be done.
WHAT MARK MOBIUS IS LOOKING FOR IN COS
You have been an emerging market veteran and you generally have been investing into emerging markets for over 25 years now. If you have to make a list of your favourite investable companies in India, what will it show?
My favourite companies in India are those that have strong balance sheets, number one, that are focussing on ESG factors, number two and are paying dividends.
What about valuations?
And the valuations of course. We look at price earnings, price to book but we found that these are not really good long-term indicators in itself. Of course, they are important but we are looking more at the growth. I am not so much interested in what the PE is today but what it is going to be in five years.
Can you give me an example that what is looking expensive today may look cheap tomorrow because growth will come back?
If you look at the banks here, if you really do the numbers and look at the non-performing loans, you will find that the price to book is very high because a lot of the assets have been wiped out. But then if you look forward, the reforms that are taking place in the banks could look pretty good going forward. So that is an example where you have to take a five year view.
So let us take the next five years, EVs is one that you talked about. Where do you think the big disruption is going to come in when it comes to India, economy, stock markets all put together?
The big disruption will be the impact of the internet and technology in general. The reason why I say that is that many of the traditional industries have not yet adopted a lot of the technology that is required. You take retail, they do not have an inventory control based on the internet, they do not have an inventory of their customer base. All these factors have to come in into play because they are going to be running into a tremendous competition.
The India romance always has been centred around consumption and when I say consumption it is autos, staples and durables. Would you buy an HUL, would you buy a Britannia or would you buy a Nestle with a five-year view?
This is a very good question because very often you will find these tremendous names, that are selling at very high multiples and again I have to emphasise what are they doing going forward? If they are going to stay where they are, I am not interested. If they are making innovations in their product base, in the way they manage their businesses then I am interested, that means growth. Even though the valuation may appear to be high now, if you are seeing that growth, going forward PE levels will go down, price to book levels will go down, dividend yields will go up that is what we are looking for.
In your investing career in India, I have been told that Templeton had nearly $10 billion directly, indirectly invested in India. Which is one business you regret buying late and one business you regret selling early?
I would say that more than business buying too late was probably the outsourcing businesses. We did not recognise the incredible potential there. Some of the mining companies, we bought a little bit too early. They had a lot of reforms to go through and the whole environmental issues came in play. We could have been waiting.
A year from now, the texture of the market would be a lot different than what we are at now. We also have a very big political risk as well. This year, you have got three state elections, the run up to the big 2019 election. What would you want to see from the government in the next one year because the big fear in the market is that they are bound to turn a little populist in the run up to the election.
I would say that if the current government could focus more strongly on the reforms that they announced when they were elected, that would go a long way towards strengthening their position. So is implementing these reforms more forcefully. A good example is what we are talking about; of foreign investment making it easier for investments to come in, particularly now because the opportunity is tremendous with the trade war between the US and China, India has got an incredible opportunity to garner some of this manufacturing.
Do you think there is a big political risk attached to the markets right now,? If the same government does not come to power, is it going to be a big derogatory factor for the equity momentum?
I do not think so because any government that gets in is going to be pushed to reform because with the internet and smartphones, everybody is aware of what is going on. The young generation are very impatient, they do not want to wait, they want action now and any government is going to be forced to act.
After an extremely successful career as an emerging market strategist with Franklin Templeton, normally people retire at this age, but you are starting your second innings. What prompted this?
Well I recognised that there was a new era taking place and it was time to get away from index investing and focus on the index. It was time to look at the ESG factors. So looking at all this, I said well maybe I better turn over a new leaf, separate myself from what went before and start something new and that is really the exciting thing,
When you hear the new ideas of the analysts it is just incredible. The analysts today are so much more advanced in technology it is quite something.
What is the mantra for you fitness because we have been seeing you for the last 15 years and not a single wrinkle, the skin is as glowing?
The key is to exercise everyday without fail. I get up in the morning, I get on the stationary bicycle, I read from my i-Pad. I read a book or something and then in the evening, I try to do some weight training. It is very important because as you get older you bones will get weak. Now my weakness is proved, that is the problem. I love sweets. So. when I come to India I go wow about Indian sweets. It is a real problem.
So Indian stocks or Indian sweets, where is the preferred choice right now?
Mark Mobius: They are both sweet.