Mumbai: Global markets have risen over the past two months and, since 9 March, most have seen an unbroken rally. Many markets are up 50%, India is up 70-75%.
Mark Mobius, executive chairman of Templeton Asset Management Ltd, who invests in several markets across the world, was one of the first to predict that global equities were readying themselves for a big rally.
In an interview, he spoke on where he sees the markets going from here, his reading of the Indian political verdict and how he intends to approach the Indian markets. Edited excerpts:
Buying opportunity:Templeton Asset’s Mark Mobius says the markets may correct by a modest 15-20%. JC Franca / Bloomberg
Is it time for a pause or you think we can still run on from here?
Well, the fact that the markets are up so much...—emerging markets in general are up 70% and, as you know, India is up more than that. I think it’s a good time to take a break and maybe have a correction, but there’s still a lot of money waiting in the wing. So...better not get too much in cash if you are fully invested at this stage.
Generally, in the past, after such big rallies, markets sometimes give back one-third of the gains, sometimes even half of the gains. Are you expecting a fall as big as that or a more modest one?
I would say it would be more modest—15-20%; something like that, of course, depending on the sector and the country..., but I think that’s a doable correction. But, as I mentioned, there’s still a lot of money waiting to (be) invested, a lot of people missed this rally and want to get it but are afraid to get in at this stage. So you’ll probably see a lot of takers if the markets come back this much. So, I would say the correction would be a little more modest.
What would be the trigger for such a correction?
It will probably be an external event. Something about interest rates, something about government policies in various parts of the world. Maybe something happening in North Korea; it could be a political event. But any trigger like that would enable the market to correct back, so I think that it could be almost anything and, of course, there would be people on the sidelines waiting for that event to come back in.
In case you get that 15-20% dip over the next few weeks or days, would you be looking to buy that dip? Would you look on that as a buying opportunity for the remainder of cash that you may be sitting on?
Well, the best thing would be to see if there are any opportunities, any bargains lying around. As I mentioned, we are up 70% from the absolute bottom and P-E (price to earnings) ratios, price-book value ratios have come up but it is still relatively cheap looking at the historical perspective. So, any correction would, of course, be an opportunity to look for cheap stocks.
What about the flip side to that in terms of an upside? Do you think there is potential for more in terms of an upside?
There is potential for much more for two reasons. One, there is more money coming into the funds—our funds and other funds around the world—dedicated to emerging markets and to India. Second, there are quite a few reasonably-priced companies, and, if we look further out from this year to 2015, for example, we see lots of growth opportunities. And, of course, the change that’s taking place politically in India means that there will be substantial economic changes, which means that there will be further growth.
Just to scratch that point on liquidity, you are saying it’s not just reserve cash or emerging market funds or Bric (Brazil, Russia, India and China) funds that are deploying in markets. Are they actually getting fresh inflows now?
That’s right. Since the beginning of this year, we have had positive flows. Of course, as you know, (in) October, November, December there were negative flows. In other words, we had more money going out than coming into funds. But now, its just the opposite and we see it accelerating as we go forward.
How do you read the Indian political verdict? Do you agree with a lot of commentators that this actually could be an economic game-changer as well? I mean, could it rerate India in terms of GDP (gross domestic product) and also earnings in your eyes?
Yes, most definitely. The fact that an incumbent party was re-elected is very significant in the history of Indian politics, as you know, and then, the fact that this party is dedicated to reforms...; even if they achieve half of what they will like to achieve, it will be a big boost to the economy. You must remember that a lot of this is about confidence. If the people are confident that the government is willing to change and institute reforms, then you are going to see money being invested, not only by domestic investors but by foreign direct investors.
What would you like to see from a financial market perspective from this government?
Well, first and foremost, disinvestment. We would like to see more shares of government-held companies offered in the market. As I mentioned, India is not a cheap market relative to other markets around the world, so you need more supply; there is just not enough supply, that’s the first thing. And, of course, if the government does that, it means they have given up on nationalist issues that have plagued privatization for so long. And with that they will hopefully do more in infrastructure, in terms of sharing with the private sector..., infrastructure projects—toll roads, rail roads—where the private sector participates. This will go a long long way towards rapidly vamping up development in the country.
Those would be the spaces then that would perhaps warrant more attention now.
That’s correct; that’s where you are going to see... The banks will benefit from that, but you are also going to see sectors like cement, heavy construction, steel, all these sectors will benefit from that move. By the way, we are seeing that in China and other countries where governments are stepping in to boost economic growth, and that’s probably one of the reasons why the commodity prices are coming up and are starting a recovery phase.
So if you are bullish on emerging markets, albeit with a bit of a correction, what are your favourite markets in the Bric countries?
Well, I would say first of all China. That would be an appropriate target because of the tremendous growth we are seeing in China... India is relatively expensive compared with the emerging markets, but the prospects, in view of the political changes that we have seen, are very, very good. So, I would say India would be the next place to look at and then there would be Russia.
Russia is probably the cheapest emerging market around; it’s very, very cheap in terms of P-E (ratios) and other measures. So I would say Russia is a place to keep an eye on.
How would global investors like you be approaching the Indian markets now? Because we hear two things, one a newfound confidence in the government, policy direction, and therefore, growth in the next few years. The flip side is that India is trading at a premium to most emerging markets... Do you think investors will still continue to buy India despite slightly stretched valuations?
No, (not) unless these reforms kick in pretty rapidly because that would mean forward expectations of earnings would increase, and that means low valuations, lower P-Es and so forth, provided that prices don’t go up so much. So, I would say there’s going to be a lot of focus on India. One aspect, which I think is very important to remember in India, is that although the large-cap stocks (stocks of companies with a high market capitalization) have moved up a lot, the small- and medium-cap stocks provide a lot of opportunity because there’s so many of them and many of them are very good companies with good opportunities.
Is that where the interest would probably shift to even among the global institutional investors?
Yes, I think so. In their search for opportunity, they would begin to move down into those mid- and small-sized companies. And, of course, the new funds, like our newly-started Asia Small Cap Fund and Global Small Cap Fund, that would be interested in the Indian small-caps.
On the point you made about India trading at a premium valuation, if that’s the case, would you be interested in increasing your cash allocation to India? Or would you just wait and watch for more details in the budget...the divestment announcements to come out?
We are still nibbling because of the new money coming in but we are still waiting for the new budget...to see how the government moves on these promises. But, nevertheless, because of this new small-cap fund for Asia and the world, we are picking up these smaller companies, so we continue to invest in these companies, large-caps we are more cautious.
When you spoke about the possible 15-20% correction, were you talking about the S&P or the US markets, because some of the emerging markets have gone up 60-70%?
I think the emerging markets would be correcting less than the US markets, if there’s a correction. I think 15-20% for emerging markets makes sense. If the markets continue their trajectory up then, of course, the correction may be more than that. So, we are not at a point where things are very expensive, and we certainly aren’t near the previous highs in terms of valuations, but we are certainly quite a way up from the bottom.
And you must remember that a lot of this is dependent upon the forward expectation for earnings and, in India’s case, it will depend on what the government policies turn out to be.