In a phone interview from Singapore on Thursday, Mobius said he expects the rupee to appreciate further to around Rs60 per dollar by the end of the year. Even as the Indian market raced to record highs, he said Franklin Templeton did not cut its India holdings, and is particularly interested in the small and mid-cap Indian stocks. Edited excerpts:
It took the Nifty nearly 10 years to reach 10,000 level from 5,000 level. How long until we reach the next milestone of 15,000?
In the case of the Nifty-50, I would say you could probably double from where you are now within the next three or four years. This would be due to a combination of things. One would be the high growth rate of the country, a more rational interest environment, where interest rates are more in line with what the market is able to pay. Also, you will see the foreign reserves of the country will continue to grow. In addition, if liberalization continues, you will see much more foreign investment coming in, in addition to the domestic investment,
Indian markets are trading at record high levels. We saw FIIs going easy on Indian equities in July. What has been your strategy of late with Indian shares? Are you adding more or are you cutting your holdings?
We certainly have not cut down on India because India is a very, very important part of our portfolio. If you look at the Asian small cap funds that we have, in particular, India is the largest weighting that we have. We continue to hold Indian stocks and buy when it is appropriate. When money comes in, we add to those position, but we are certainly not willing to sell at these levels.
Earnings growth is still elusive. When do you think earnings growth will return for Indian companies?
It is a matter of what category are you looking at. In the case of small and medium cap stocks, earnings growth has been pretty good. You must remember all these stocks will be graduating up into the large cap arena. I would not worry too much about that.
Do you think we could see a correction in the near to medium term in the Indian market, or do you think the rally will continue to hold good for a while?
There will be a correction on the way, because you’ve seen almost a continuous rise from early this year. Markets just shot up continuously. Whenever you have that kind of a situation, you can expect a fall back. It can happen any time, it just depends on what the trigger is.
Where do Indian markets stand in your preference order among EMs and why?
India is among the top three. China, India and Thailand are the top countries that we have right now.
Do you think US markets are overvalued—and to that extent money could flow to EMs?
The US markets continues to rise. I am surprised that people talk about a downturn in the US market, but S&P has not come down at all. That does not mean that money is not going to go to the other markets, because just remember that when people make profits in the US, they want to diversify. Many of them are underweight emerging markets generally.
The rupee is at a two-year high. Did you see this coming? Where do you see the rupee heading from here?
I see the Indian rupee continuing to get stronger and probably hit Rs60 against the US dollar by the end of the year on the back of growth in India, strong and rising reserves. If you look at the price parity in India, it is not overvalued.
The market is largely supported by domestic money? Do you think this is set to grow?
As interest rates come down, as deposit rates come down, people will begin to look at other alternatives, other ways to make money. That will also drive people to equity markets.
Cyclical, consumption, defensives—what is going to be the theme for Indian markets for the next year?
Right now, it is very much the consumption story. But I think going forward it is going to be an infrastructure story, because I think the Indian government realizes that they are far behind China in infrastructure, and something has to be done about that. The part of it comes from privatization of the state-owned enterprises, part of it will come from raising money for infrastructure projects, and of course, the way you do that is by making it safer for infrastructure investors to go into the market.
What are your thoughts on reforms such as demonetisation and GST (goods and services tax Act)? What is on your wish list on more reforms?
The demonetisation did not turn out to be as bad as I expected. When it first came in, I thought this is clearly going to have a bad effect on the economy. I think it is not as bad as expected. The good news is that it has tuned in people more into electronic payments, which is good for the economy to speed things up. I think the challenge going forward for (prime minister Narendra) Modi is going to be that the GST implementation goes through without state governments introducing new taxes and new levies, which could be very detrimental to the whole system.
The next wish list is general relaxing of foreign investment restrictions. That will free up a lot of capital to come in.
Which are your favourite sectoral bets in India at this point?
Currently, the small and mid cap stocks are of interest to us. Among individual sectors, I would say diversified companies, private small banks, materials, and chemical companies. We also like automobile tyres.
What are your thoughts on state-run banks after the recent crackdown by RBI on bad loans?
They look good now. We are not too worried about the bad loans for the state-owned banks.
What is the biggest risk to Indian markets right now?
I think the geopolitical risks. There is stress with China, there is some stress with Pakistan that still continues. If you have an outbreak, it will not be good for the markets.