Mobius Says India’s Small Caps May Gain More Amid Modi Plans

(Bloomberg) -- A three-year rally for Indian small-cap stocks may extend further on growing signs interest rates are headed down in the world’s fastest-growing economy, Mark Mobius said.

India is forecast to grow as much as 7.2 percent this year as Prime Minister Narendra Modi’s plans to boost infrastructure and open up industries such as railways and defense to foreign investment have also bolstered consumer spending. Mobius, the executive chairman of Templeton Emerging Markets Group, said the company has made the South Asian country a top pick in emerging markets and invested as much as $2 billion in its equities.

“India is in a very sweet spot,” Mobius said at a Bloomberg event in Mumbai on Friday. “There is so much variety and so much opportunity, particularly in the small- and medium-cap stocks.”

Mobius, 80, who is closely associated with raising the status of emerging markets as a place for investment, said Modi’s plans to overhaul the country’s economy are one of the most exciting things about India. While the plan to introduce a nationwide sales tax by April 1 may not be fully implemented in 2017, it’s a step in the right direction, Mobius said. Templeton has $600 million of its total Indian investment in small companies, he said in an interview in June.

Small-Caps Outperform

Investor demand has been especially strong for small-cap stocks in recent years as they beat every other major Indian asset class. The S&P BSE SmallCap index has jumped 149 percent since Modi was named the prime ministerial candidate of India’s Bharatiya Janata Party in September 2013, compared with a 51 percent gain for the large-cap S&P BSE Sensex and a 12.5 percent return on local government bonds.

India’s growth prospects don’t come cheap. The small-cap index has risen 13.5 percent this year to an all-time high, almost double the gains in the MSCI Emerging Markets Small-Cap Index. The Indian index traded for 2.1 times net assets last month, nearing the ratio of 2.2 that signified the start of a brief bear market in August 2015. Pricey valuations don’t deter Mobius.

“Interest rates are going down and the economy is growing, putting that together you can justify higher valuations,” he said Friday.

India’s new central bank Governor Urjit Patel led the country’s Monetary Policy Committee earlier this month to cut interest rates to the lowest in more than five years and signaled a looser tolerance for price pressures.

Domestic Liquidity

Government data since then has shown that consumer price gains slowed in September to a 13-month low. Exports rose in September at the fastest pace in almost two years and other indicators like steel output recovered in August.

The impact on Indian equities of events such as a Federal Reserve rate increase will be cushioned by the growing pool of domestic capital, Mobius said. Local mutual funds have bought $2.8 billion of shares this year, after plowing a record $10.5 billion in 2015, data compiled by Bloomberg show.

The inflows have supplemented purchases of $7.5 billion by foreigners since Jan. 1, helping buffer Indian markets from events such as Brexit and China’s devaluation of the yuan.

”I don’t think it will happen,” Mobius said, referring to the possibility of capital outflows once Fed starts raising borrowing costs. “The reason is domestic investors are becoming more important. Going forward, they will drive the market, not foreign investors.”

--With assistance from Anurag Kotoky and Kartik Goyal To contact the reporters on this story: Santanu Chakraborty in Mumbai at schakrabor11@bloomberg.net, Rajhkumar K Shaaw in Mumbai at rshaaw@bloomberg.net. To contact the editors responsible for this story: Jeff Sutherland at jsutherlan13@bloomberg.net, Arijit Ghosh at aghosh@bloomberg.net, Ravil Shirodkar, Lena Lee