Singapore: Reliance Jio Infocomm Ltd’s entry into the telecom space is set to change the composition of the Indian economy, and its impact will be felt across all sectors, and investors should look at companies that are set to benefit from this communications revolution, said Mark Mobius, executive chairman of Templeton Emerging Markets Group at Franklin Templeton Investments.
Mobius, who oversees the Templeton research team based in 18 global emerging markets offices, said he would give high marks for the performance of the Narendra Modi government so far. He cautioned that after the passage of reforms, the focus would shift to implementation.
“We have got to see implementation of those reforms so that the economy can grow and accelerate and continue on the high growth rate. So, I would say India offers an opportunity and a pitfall, and we have to keep an eye out for it,” he added in an interview.
India has recently seen three big reforms over the past few months—the goods and services tax, a relaxation in foreign direct investment norms and the bankruptcy law being passed. As an investor, how do you view these steps? Are these the last of the big reforms from the Modi government?
All those steps are very good and the tax one is excellent. Now, what has to be done is implementation, because implementation with each state is really the key going forward. So, we have to look and see how fast implementation can take place, because that will determine the success of this reform. But, we are very excited about these changes, and the impact, of course, will be far-reaching, and will really be very dramatic going forward. That’s really the key, because we must not overlook the fact that implementation is probably more difficult. Getting passed in Parliament is one thing, but getting each state to implement it, to reduce the bureaucracy, to make things more efficient—that is really the key to success.
The perception among investors outside is that the Indian markets are expensive.
We are very excited about the Indian market. If you look at global firms, you’ll notice that India rating has been increasing. We are definitely very focused on India. Growth rate is very high, and we believe that this will continue with the reforms that we have seen, and so we are quite excited about it.
Which are the sectors in the Indian market that you are excited about?
First one, of course, is tech—software, in particular, is very good for us. Secondly, it is the consumer sector and, particularly with the tax reform, I believe that the consumer sector will really surge ahead. Also, the companies and industries that will benefit from the revolution in communications with RIL’s (Reliance Industries Ltd’s) entry into telecoms, they are going to make telecommunications—data—cheaper for everyone in India. This will set off a revolution in innovation and, I believe, companies that can benefit from that will really be the ones that you would want to look at. A lot of that will be consumer-oriented.
How do you see RIL’s entry into telecoms? Will it be a game changer?
No question about it. It is going to be a game changer. By bringing down the cost of the telecoms, and by enabling people to utilize telecommunications in a bigger way, cheaper, faster and more efficient way, the entire composition of the economy will change. This goes for the financial sector, it goes for the consumer sector, even goes for the industrial sector—so, everybody will be impacted by this. It’s true that the competition has been hurt temporarily with RIL’s entry, but I think they will step up to the plate and be ready to compete.
Which sectors in the Indian market should one avoid at this time?
I think it is not “avoid”—but we have to be very cautious when it comes to the finance sector. As I mentioned, the changes that telecommunications and mobile will bring about to banking and transfer of money—that is going to have a big impact on the financial sector. Those financial sector companies that are not able to keep up, they will be at a disadvantage. The other area is the companies that have benefited from the restrictions—state restrictions, border control restrictions, tax restrictions—these companies are going to be impacted soon, and we have to be very careful. Again, the companies which had state monopolies in certain areas because of the inability of competitors to come in—those companies are going to be impacted, too. So, we have to be careful about not picking these companies.
Recently, in your blog, you had said while India is growing faster than China, the latter continues to be your top bet among emerging markets.
That’s mainly because of the size of China. You have a lot of liquid and large companies in the China market, and access is easy through the Hong Kong market, which enables us to get in and out of Chinese companies. However, with these reforms in India, you will see the rating on India increase. If you see our global funds, you will see that happening already.
Overall, how worried or optimistic are you on China?
I am pretty optimistic about China. I know people are concerned about the debt, about the leverage, etc., but at the end of the day, it is a communist-controlled society, and they can control the heavy leverage that a lot of the companies have. As you know, the big banks and big companies there are all controlled by the government... It’s a big economy—growth is continuing not only because of government spending, but also because of private sector growth. So, we’re optimistic. But in a country like that, just like in India, there will be winners and losers. We have to be very careful in stock selection.
In a recent blog, you said that in 2016, emerging markets have outperformed developed markets in US dollar terms. What is your take on the mid-term and long-term performance of emerging markets equities when compared with the developed markets?
In the long term, there is no question that emerging markets will outperform for the simple reason that economic growth in emerging markets will continue to be at least double that of the developed countries. So, as long as that is the case, we can expect emerging markets to outperform. If you look at history, there is a correlation between market performance and economic growth. So, that’s an important point to keep in mind. The other thing is that there is a slew of frontier markets—countries that are just starting out in the market economy adventure and these companies and countries will be growing at a very fast pace because they’re starting from a low base. That also will boost emerging markets generally.
How do you see the emerging markets being impacted by the gradual increase in US interest rates?
It’s very important to look at the history of interest rates and emerging markets’ performance. If you compare the US Feds funds rate against the emerging markets performance, there is no real correlation. For example, the period between 1988 and 1993, interest rates went down and the emerging markets went up. Everybody expects a correlation between interest rates and performance; but then, if you look at the period from 2003 to 2007, interest rates went up and the emerging markets boomed. From 2007-09, the correlation held because interest rates went down and the emerging markets went down. So, it’s different from what you would expect. I think people are putting too much weight on the interest rate, particularly the US Federal Reserve rate and what the markets will do. There is a good chance that if the US Fed raises the interest rate, then emerging markets could outperform. You just cannot say that when interest rates go up, the market goes down. It doesn’t work that way. History shows that’s not the case.
How do you rate the performance of the Modi government so far? Do you think it has delivered on many of its promises in terms of reforms, in terms of ease of doing business?
I think there was too much euphoria when they were elected, and we foresaw that they would have difficulty in the beginning. So, we didn’t expect the tremendous surge of reforms because we knew the barriers that they were facing in Parliament and so forth. However, the fact that they have been able to pass the tax reform and that they have been able to make changes is very heartening to us. To us, it indicates that the Modi government has done a pretty good job. I would have like to see (former Reserve Bank of India governor) Raghuram Rajan to stay on in the central bank. That is probably one negative to the Modi government; but then, if his successor continues on the same policies in a quiet way, then it should be OK. I would say we would give them high marks for performance.
In India, what do you feel are the challenges and risks going forward?
Again, it is not just the degree to which reform takes place. We have got to see implementation of those reforms so that the economy can grow and accelerate and continue on the high growth rate. So, I would say India offers an opportunity and a pitfall, and we have to keep an eye out for it.
How do you see the private equity space in South-East Asia?
It’s very good. It is a great opportunity here in South-East Asia because there are so many new enterprises that are getting started and, of course, the impact of China on South-East Asia, in most parts, is very positive. China is, of course, the main trading partner, and as China surges ahead, these countries will be pulled along with them. So, lots of opportunities in the private sector area.