Mumbai: India ranks second after China in Mark Mobius’s emerging market preference order. Mobius, executive chairman of the Templeton Emerging Markets Group at Franklin Templeton Investments, said the ongoing bull run in Indian stocks could continue for the next few years, but it is likely to be interrupted by intermittent corrections.
Mobius, who is dubbed as an emerging market guru, said he is upbeat on the prospects of Prime Minister Narendra Modi’s “Make in India” campaign. In a phone interview from Beijing, he said the growing Indian e-commerce sector holds promise and Indian companies can replicate the Alibaba Group’s success. China’s Alibaba had raised a record $21.8 billion in a September initial public offering (IPO). Edited excerpts:
Indian markets are currently at record high levels. What is your outlook for Indian markets from here?
There will be corrections along the way. We are probably in a rally that is halfway done, but there will be substantial correction going forward, and then we will see a resumption of the bull market. The bull market should continue for the next few years, but we must be ready for substantial corrections along the way.
What I see going forward is that the market will go higher and higher, because we are in a bull market in India. However, investors must expect some fairly large corrections along the way. In this day and age, corrections of 20% are not unusual, so people should be ready for these corrections. But as I said, we are in an ongoing bull market. In one, two, three, four years, the Indian markets should be higher than where it is now.
Why do you think there could be a correction in the offing?
The euphoria about the Modi election created sort of a buying panic, and everyone got carried away, buying everything they could. Whenever you have that kind of situation, there usually is some kind of correction.
People were hoping for faster action. But I can understand that Modi is more concerned about solidifying the control of the state governments. He cannot implement the national programme without the support of the states.
What do you think of deliveries by the Modi government so far?
He has not really converted any of the actions that he promised during the election. I believe the reason for that is he wanted to spend time on the state elections in order to consolidate his power, and then launch the reform programme. So, hopefully now that he has been successful in the state elections, he can now start the reform programme.
What do you think he can do to help the markets going forward?
In the short term, he can do a number of things to encourage and allow more investments—both direct and portfolio investments. As you know, there is a bottleneck at the entry level for foreign investors in large institutional investors, who have a problem in getting permission to bring money into the market to buy stocks. With a stroke of the pen, he could certainly clear that barrier and this could result in quite a lot of new money coming into the market.
There a number of requirements by Sebi (Securities and Exchange Board of India) and the ministry of finance that large institutional funds must meet to come into the country and those requirements are very difficult, if not impossible to meet. Therefore, this prevents this money from coming into the country.
What kind of reforms do you expect from the Modi government?
First of all, it will of course be to eliminate the subsidies in fuel, and with the lower oil prices, it should be easier to do now. If he grabs that opportunity, it will be a very big step in the reform process. Hopefully, he will do it as soon as possible. The second thing is with regards to employment laws. He should make it easier for employees to be hired and fired. Right now, the requirements are quite onerous and it prevents companies from hiring people.
Where does India currently stand in your emerging market preference list?
India, currently, is right after China, which ranks first.
What kind of impact do you think the unplugging of the quantitative easing programme could have on emerging markets in general and India in particular?
In the short run, I don’t think there will be much impact. The tapering programme or the end of the Fed (US Federal Reserve) bond-buying programme will mean that there is still a great deal of liquidity in the system that has not been withdrawn. I believe emerging markets will not be impacted so much. For the time being, the emerging markets should be able to do quite well.
When do you see US interest rates going up?
The interest rates will gradually move up by the end of 2015. This will not be excessive, it will be gradual. The important thing to focus on will be the spread between the US rates and emerging market rates in general. Many of the emerging markets have quite good macroeconomic parameters, many have them have low debt-to-GDP (gross domestic product) ratio, many of them have high foreign reserves, and many of them are in a high-growth mode. So, these factors will mean that interest rates in the countries will not be going up dramatically. So, this spread between the emerging market interest rates and US interest rates will not be intensive, and of course it will be favourable for emerging market equities.
Modi has launched the “Make in India” campaign. Do you think it can be work in India?
Of course, it can work very well in India. The labour rates in India are quite low in comparison with China, and you have an English-speaking population. So, there is a wonderful opportunity to increase manufacturing in India. If Modi is able to introduce the programmes that he was able to implement in Gujarat, his home state, then there is no question that there could be a boom in manufacturing in India.
Recently, we have seen massive investments in the Indian e-commerce industry.
E-commerce globally is in a boom stage right now, and India of course is benefiting from this boom as well. Clearly, the e-commerce industry is growing at a rapid pace in India and will continue to grow.
Do you think India can produce its own Alibaba?
Yes, companies in India can definitely rise up to that challenge and can create world-renowned companies in this area.
Which companies or sectors are you very positive about and why?
Right now, we are positive on the technology sector and outsourcing. There are very capable companies in this area, which are successful internationally. We are in the pharmaceutical sector, too. There are very innovative companies in that sector in India that are doing a good job. We are also looking at the oil and gas and natural resources sector.
If you look at our portfolios, you will see Tata Consultancy Services Ltd at the top there, you will see Dr Reddy’s Laboratories and Tata Chemicals as well.
Which are the sectors you would ignore or are negative about at this point of time?
The only ones we would ignore are those that have corporate governance issues.
What is your view on the Indian currency and interest rates in the country?
The Indian currency against the US dollar will probably weaken a little bit, but not substantially. There won’t be any big moves from here. If the policies we talked about are implemented, the interest rates would probably remain where they are or they can go down. With policy changes, inflation will not be a problem and, therefore, the Reserve Bank would be able to lower rates. A lot depends on the reforms programme, of course.
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