Mark Mobius Prefers Having A Larger Equity Exposure In India Than China

Well, the outcome is really a big surprise. All of us didn’t expect him to win by such a margin and its terrific news as it means that he now has the power to move ahead more aggressively than even his first term. It’s an excellent news.

Now he has to start looking at labor reform. The whole regulation of labor in India is out of whack with the requirements of the economy. We got to get the people employed on a massive scale. You have got 100 million people moving around in India looking for jobs at any point of time. Farm sector is in trouble and these people need work. They need to get off the farms and work into cities and the urban areas. So, I think that’s the big challenge for Modi.

It certainly excited me. I have been bullish on India for quite a while now. This is really a nice change from my point of view. I wish I had more in India before this, but we have been investing and we want to put more in India as a result of this.

I think so. None of the announcements or actions taken show that these reforms are going to be kicking in very soon. Of course earnings could move up and that would mean valuations and price earnings ratios could move down and that would make market more attractive. What we are doing is looking at the medium size and smaller companies in India that may have not moved up as much as big boys and that’s where we want to see opportunities. But as I said these reforms have to kick in pretty soon for the optimism to maintain. I am not saying that optimism will not be maintained for a longer term but in the short term we got to see some real action on the part of the Modi Government.

So many ETFs, exchange rated funds, index funds follow the index and the fact that you have China as a big factor in the index, about 30 percent, that drags down the index and therefore put people off in emerging markets generally. Now of course there are a lot of people like us who say look I don’t look at the index and I am going to invest where I see the opportunity and that means going to India. So, it’s a mixed picture but I would say the point you made is very well taken. Tracking down of index is not good for emerging market generally and India too.

What is happening in that case in the case of portfolio investing is fact that China is getting bigger and bigger in the index. So, a lot of the ETFs and index fund must put more money into China. That’s one of the reasons why you see the flow. The other is that there are long term investors, from overseas that have been putting money into China to take advantage of this incredible consumer market in China, which is so growing, that is a fact.

The third is that the Chinese government wants to have more foreign exchange in flows in order of offset the problems with the trade. If trade goes down and they are not earning so much on trade, they want to have these foreign inflows to make sure their foreign exchange reserve is growing. So, there are number of factors to point out what you are saying.

One of the things which we see in India is that there is a lot of reserves, these companies often have very strong balance sheets. So, they do have resources to expand. If they are optimistic and believe that Modi will make changes that benefit their businesses there will be investing. There is no question about that.

The other good news is that the investors looking at this companies and seeing the strong balance sheets will be willing to put more money in and that will be positive in terms of capital raising.

There is a final factor which is consumer spending in India is moving up and the access to information about products, services is expanding as the number of people with smartphones increases dramatically in India. I think all these factors are important and giving confidence to capital markets.

They will benefit, and they will be purveyors of growth. There is incredible work that Reliance is doing in laying fiber all over India and making communications cheaper. They have benefited the general economy as a result of acceleration in communication. Now, we have to do more on infrastructure, roads, rail roads, airports. Lot of it has been done but more has to be done in aircraft areas and airlines have to be improved in India to take care of the incredible growth. That’s where the challenge will be going forward.

Nobody knows what the RBI will do. I think they will be cautious in raising rates. They may even lower rates. There is some talk about inflation in India moving up, but I don’t think it is significant. If Modi reforms kick in, then you will see inflation coming down because the economy will be much more efficient as you will see much better situation in terms of capital raising.

With confidence comes credit and with credit comes money. I believe that more and more people will be willing to finance companies, buy bonds because of the confidence which we see from the Modi win. So, a lot of the problems the banks have had in recent past will be solved. Already, they have been solved to some degree, helped by the government. But now you will see private money coming in and moving up some of these companies and strengthening their balance sheets and bank’s balance sheets.

You have looked at EMs and India for a long time. As your team scouts India for newer investment opportunities would you find it comfortable to go out and park large money in work in India in specific pockets?

I will prefer to put more money in India and even have a weighting in India which is larger than China. Simply because of the growth prospects and incredible opportunities that we are seeing. This depends on many factors like liquidity. When you look at some of companies, then liquidity is not good as you like. But generally speaking, we’d like to put more money into India.

We have found that there are many industrial companies, manufacturers in India that have excess capacity. They can expand their markets that are going global. Many of them in terms of technology are doing a good job. I am interested in those companies which can supply the infrastructure market as we believe that infrastructure spending will be increasing, and Modi will be doing more in that space. For anything which will supply this growth, it will be very important. For example, a company which produces pipes would be very good area to invest. Steel, reinforcing bars, all of this kind of activity we are looking at. That would be one area.

The other area would be non-banking financial area. Many people are down on that sector and some companies have problems. I believe with the expansion in terms of banking with identity card system kicking in and people opening bank accounts and being more familiar with banking sector, being able to access credit then that would be big growth area and we want to be exposed to it. So, those two areas are important.

If you look at consumer area, anything which involving consumer spending is something we want to look at. Unfortunately, many of these stocks are expensive but we are continuing to look at it.

Whenever there is euphoria it is followed by some depression in some degree. I hate to say this time it is different because those are probably the most expensive words of the world. There is a difference now as things have accelerated because of the communications revolution. The fact that Modi has got a stronger mandate than the first time around means that there is opportunity to move further ahead. I get the feeling that we will get much better changes than the first time. This may be over optimistic, but it is fair statement to make.

I think the next leg will be big one and it will surpass the previous high of last year. Just looking at MSEI index, we still have to pass that high and it will be done. You will get corrections long way, but the general trend is up and I expect previous high to be surpassed.