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Trump’s Big Spending Plans Will Lead To A Weaker Dollar, Says Mark Mobius

A weaker dollar will propel emerging market equities, Mobius said.

Mark Mobius, executive chairman of Templeton Emerging Markets Group (Source: BloombergQuint)
Mark Mobius, executive chairman of Templeton Emerging Markets Group (Source: BloombergQuint)

Mark Mobius expects the U.S. dollar to weaken, as U.S. President Donald Trump increases infrastructure and defence spending. A weaker dollar will propel emerging market equities, the executive chairman of Templeton Emerging Markets Group said on Thank God It’s Friday this week.

India is in a long-term secular bull market despite through small corrections cannot be ruled out, he added.

Here are edited excerpts from that conversation.

How do you see the movement of the dollar develop going forward?

I think the dollar will probably get weaker vis-a-vis a lot of other countries around the world. As you know, many of the currencies were weak last year against the dollar. Some of them have recovered, particularly some emerging market currencies. But still I would say most of these currencies are undervalued against the dollar. I believe the dollar will probably get weaker for a number of reasons. First of all, although the Fed will raise rates, inflation will probably be ahead of those rate rises. Number two, Trump is embarking on a big spending program and not only in defence but also infrastructure. I was very surprised by the standing ovations. He was getting enormous applause at every point he made regarding spending on defence and on infrastructure. At the same time, he got a standing ovation on tax cuts. If you combine all these together you realise that the debt in the U.S. must increase and therefore ratings agencies will have to take note of these deficits positions. Going forward, if his plans work out you’ll get more money in as the economy recovers. But in the short run there will probably be a weakening of the dollar. Not only because the reasons I’ve mentioned but also because he explicitly stated the need for a weaker dollar so that Americans can export.

‘Euro Will Survive’

We are looking at general elections in Germany, France and Netherlands this year. Should the incumbents not get re-elected in the elections, what is the chance that these countries will want to bring back their own currencies? In that case, what happens to trade? Could we see a substantially weakened euro then?

The abandonment of the euro is a very unlikely scenario. The euro has had such benefits throughout the European Union that I do not see that changing any time soon. Of course, many of the individual countries may decide to opt out of many of the European Union mandates and legal perditions that they have made. But I doubt if the European currency will be abandoned. It is quite unlikely.

More Legs To The Commodity Rally?

Commodities have run up over the past year. Is there more steam left and do commodity-related stocks in Asia have more upside?

For the last three years and up to end of last year, commodities were doing very badly with prices of most commodities going down. But now we have seen a recovery. Some of the recovery has been quite amazing. For example, from the very low point, oil has gone up by 100 percent. But I do not think we are going to see big increases in percentage terms going from here. We will probably have a sideways movement in commodities and you must remember that although demand may pick up, there won’t be a big surge coming out of China in terms of demand. And also, even the U.S. considering the infrastructure spending, that demand will be good but it won’t be enough to move the needle in terms of prices for commodities.

Preferred Emerging Markets

How would you rank emerging market countries from most to least preferred?

Well, we have to start with Asia because Asia is the fastest-growing region. China and India are both growing at 6-7 percent each. We cannot ignore that kind of growth. Of course, markets are different. They behave differently than the economic growth numbers but there is still many bargains in these markets. Vietnam stands out as a particularly interesting area in Asia. If we look at Latin America, you will see that Mexico, Brazil, Argentina are outstanding opportunities. We would look at those areas. There is reform taking place in South Africa which looks good and the currency is very undervalued at this stage in the game. So, that would be another area I would look at. These would be the highlights I would say.

You have increased your exposure to Brazil and Mexico. What are the driving factors here?

Yes, in fact I just returned from Brazil. I was there two days ago. It is very interesting to see what is happening there. You have heard about the Lava Jato scandals. The scandals have reached way up, into the parliament. Many parliamentarians have been charged with corruption. So these corruption investigations are introducing a tremendous amount of reform in that country which is going to pay off in a big way.  The government is moving very quickly to induce investment, both local and foreign investment, because they realise they don’t have the money to spend to do what they need to do. That is very good news because it would bring more efficiency into the economy. I would say Brazil is at the top of the list followed by Argentina. The new government in Argentina is making many good reforms. The economy will do good going forward. In Mexico, although you have this problem with Trump, the ‘wall’ and all these other charges, the fact remains that Mexico and the U.S. are highly interdependent. It will be very difficult to break those ties. We believe given the bad news about Mexico and the depressed prices of both currency and stocks, there are many good opportunities there.

India Advantage

Is the bull run intact for India or can we expect some time-wise correction before we see Indian indices rise to higher levels?

There’s no question that India is in a long-term secular bull market. However, we must also realise that in any bull market there are substantial corrections. In these corrections, you often scare people, they get out too early, and they give up. But the fact remains that India is in a long-term secular bull market. So I believe that we have to have positions in India, particularly in the small and medium size companies although there are also many great companies among the large caps as well.

View On IT Stocks

If I were to compare India to countries like Thailand and Indonesia, I believe you’d choose Thailand and Indonesia. At what point will India start being a little more appealing at least when it comes to valuations.

I wouldn’t say we’d compare Thailand or Indonesia to India for one very simple reason. India is moving up very quickly on the technology spectrum. If you look at the tech stocks, whether it be internet stocks or outsourcing, they sell at a higher multiple in the near term, let’s say at a one-year projection. But over a five-year term, many of these stocks are growing at a pace which make them very cheap. So we have to very cautious about the current price-to-earnings or cash flow numbers. They can be misleading in that sense.

India Opportunities

Barring tech stocks out, where do you see opportunity in India right now?

Given that the economy is moving at this pace and given the fact that there has been a temporary slowdown due to the currency problem, I would say the banks look interesting. Because we would want exposure to the economy as a whole and the banks are the best way to do that.

‘Avoid Construction Stocks’

And areas that you would absolutely avoid in India?

I wouldn’t say that we would avoid anything, except maybe companies in the construction sector because, as you know, there are going to be problems in that sector going forward. Not only because there’s no demand, there’s plenty of demand, that’s not a problem. The problem is the inter-government relations between construction companies and government regulations could create real problems for that industry.

Investment Strategy

Some investment mistakes that young investors can avoid?

The first thing is to think short term. If you’re thinking short term, you’re bound to make mistakes because things are happening around us that can be misleading. Second thing is that don’t believe what you read. Check out whatever you read in the newspapers or the internet to make sure the facts are correct. Many people are mislead by what they hear or read. The third thing is to make long-term investments. Don’t think about making a quick profit. Think about making a profit in a 5-year period. This way you’ll probably make wiser decisions.