Mark Mobius, founding Partner, Mobius Capital Partners, is one of the most prominent emerging markets fund manager. Mobius, 82, who was formerly Executive Chairman of Templeton Emerging Markets Group, has over four decades of experience when it comes to working with emerging and frontier markets.
Speaking about the ongoing trade war between the US and China, Mobius said that it is unlikely that the tension will be resolved any time soon. “I do not think it is going to be resolved anytime soon simply because it is now not only about trade, it is about technology transfer, it is about rules and regulations,” said Mobius.
Here is the full transcript of his interview.
Q: Let me start with the Jerome Powell statement. What did you make of it and how does it shift the weight for emerging markets in the scheme of things?
A: I think he is feeling the Trump power. I think Trump as you know did not like him raising rates. So I think he is giving a token benefit to Trump in some ways.
However, on the other side, I think it is fair for him to do that. He probably will have another hike before the end of the year and then they will probably be in a pretty good space to prevent any further big uptick on inflation.
Q: I take your point that many people will look for a Trump effect, but you will have to give it to Jerome Powell that there has been a fairly steep fall in crude prices and several other commodities as well, we saw even metal prices falling. So is it possible that you will see the dot chart change when the Fed meets and we are going to see the markets pricing in fewer rate hikes in 2019?
A: I think so, particularly if oil prices stay where they are or maybe even go lower. That is the key point. I think the point that you just made is very good because at the end of the day inflation in America is very much dependent upon what people have to pay for their gasoline and all fuels. So, this is going to be a very important point going forward.
Hopefully the oil prices will stay low and that will be good for the US and good for India, good for China, and good for many other countries.
Q: Do you think we should not run away with this changed scenario, do you think things like non-farm payroll numbers or the Trump-Xi meet at the G20, all this can give growth a leg up and this could just be a trading bounce?
A: Yes, but I think we have to be very careful about the China-US trade war. I do not think it is going to be resolved anytime soon simply because it is now not only about trade, it is about technology transfer, it is about rules and regulations that foreign companies, particularly US companies have to endure when they go into China and all these other factors are playing into this in addition to the military side of things where the US is beginning to say China is getting too powerful and South China sea is taking too much territory, etc. So I think it is a wider issue that will take time to resolve.
However, what I have been saying to everyone is that, in a situation like this, there are winners and losers and I believe that a lot of the exports going from China to the US could be well going from India to the US, from Vietnam to the US, or from Bangladesh to US. So there is a great opportunity for many of these countries to diversify their export base to the US.
Q: As a veteran investor in emerging markets, are you getting the sense that the weight is now shifting in favour of emerging market? Even before Jerome Powell’s statement, it looked like developed markets were beginning to under perform emerging markets.
A: That is for sure. As you know, the US market is down by about 10 percent. It has had a little jump recently, but basically we are now in let us say a level playing field with the US market, maybe even going down. However, people are beginning to think we have had this incredible run in the US, maybe we should start diversifying. So, we are seeing a lot more interest now in global markets outside the US and of course that means emerging markets as well.
Q: Within the emerging markets, what is your pecking order at this juncture?
A: I would love India, not because I am on Indian TV, but because there are so many opportunities in India going forward. We are really interested in doing more in India. I would say India is at the top of the list. Of course China is still important, but not as important as India to my eyes.
Then you have got to go to those countries that have really bombed out so to speak, countries like Turkey where the currency has gone down by over 70 percent, places like Argentina. Of course Brazil is high on our list, it has already jumped quite a lot from the bottom, but still it has a long way to go. So those are the countries that interests us the most at this stage.
Q: What makes India tick for you?
A: First of all diversity. You have got incredible diverse list of companies in the various states and also you have got incredible entrepreneurial activity taking place in India in many directions.
I think the relative openness of the Indian government to find investment is very positive. So you see a lot of the American technology companies going into India. Of course the Indian companies learn about these companies and then can emulate a lot of that activity and grow on that basis.
Of course as you know, many of the entrepreneurs in the US are Indian in their backgrounds. So, there is an incredible concert of intelligence that is taking place.
Q: That said, some investors lately have been a little exasperated by the lack of promised earnings growth. For the last four years I think analysts begin the year expecting a 20-25 percent earnings growth and by the end of the year it is scaled down to high single digits, sometimes even low single digits. Will that exasperate you?
A: If you look at the average for emerging markets generally, it is high single digit and then low double digit – that is common. You must remember that the high interest rate environment in India does put a dampener on Indian earnings for the short term.
However, going forward, we are looking not at this year, but next year, the year after, over a five year period, I believe that the Indian earnings will catch up and do very well. So now it is sort of a base building period taking place. As interest rates stabilize and even go down hopefully, then you can see these earnings picking up very nicely.
Q: What are the specific sectors where you are concentrating? You already spoke about Indian IT and how Indians have made their mark in infotech in the US, would that be a sector that you would go for?
A: Yes, provided that the prices are right. As you know, some of these stocks are pretty expensive even looking at a long term earnings momentum. So we have to be very careful as to which ones we select. So we are going after those tech companies that have a solid balance sheet, have something really different to say and they will look like they are going to have reasonable earnings growth going forward.
However, in addition to the IT space, we are also interested in micro finance. That may be surprising to some people because of the difficulties that the financial sector has had recently in India, but I believe long term the micro finance, finance tech, fintech, generally is a very interesting area.
The other area that we are interested in is consumer. Consumer space in retail because what you are seeing, is the transformation taking place online, offline coming together in the retail space and that is very exciting.
Q: Big giants like Amazon and Walmart have been interested in the retail space. Is that something that interests you as well, the few remaining Indian retailers?
A: Yes definitely. We are particular interested in those that are adopting the online technology to combine with offline. This development is very important in retail. Retailers that are not paying attention to that will be in big trouble in my view. So we are very interested in companies that can combine these areas and adopt that technology.
Q: You referred to the financial space in the problems. Have you gone through the kind of contraction or ill-liquidity the debt market faced and that hurt the non-banking finance companies a goodish bit? Any thoughts on whether you think that problem is over and you will start buying the non-banks?
A: It is not over but there are selected non-banks that are now at prices that make them terrific bargains. What is going to happen in the sector is that you are going to see a number dropouts, numbers of companies will just fail and fade away, and that means the survivors will have a bigger market share.
The other thing that is happening is that these companies are beginning to realize that they have got to have their own funding base. So some of them are going for banking licenses so they can bring in deposits. That will be very important for survival of the sector.
Q: I wanted to ask you, last time you had trouble with getting through the Indian regulations and getting a registration here. Are you through and is Mobius Capital Partners ready to invest?
A: We have not gotten through yet, but we are getting close. We figure it is going to be another month or so. So we are really pushing very hard to get that done. I must say it is not only to do with Sebi, but also the banks that we deal with, the foreign banks, there are custodians in India, City Bank and others, who really have a lot of paper work that we have to go through. So hopefully within a month or so we can start.
Q: You spoke about non-banks probably now emerging out of a consolidation. What about the banks themselves, now the terrain is a little more open for them, would you want to buy them the moment you get your licence, would they be the most attractive candidates?
A: We are more interested in the smaller banks. So, yes, the answer is yes, but we would not go for the bigger banks, we will go for the smaller banks that have potential for growth and who have gone through this process and survived. That is really at the end of the day the key lesson that we learned, the survivors are the ones that we know will probably survive another crisis and we should be looking at those companies.
Q: Speaking about banks and non-banks, have you been watching the kind of standoff that we saw some days back between the Reserve Bank of India (RBI) and the government? What are your comments on that standoff?
A: It is very interesting. It reminded me the story of Dillinger, the great bank robber in the US in 1930s. Someone asked him why do you steal from banks, and he said because that is where the money is. This is the way the government thinks that we are going to go where the money is.
Frankly, I think it is not a bad thing. I think why not, why shouldn’t the government take some of the money from the RBI to have infrastructure development and other projects? I do not think anything bad about that as long as the central bank has enough reserves to deal with the problems they have with the currency and interest rates. At the end of the day, I am not totally against that.
Q: What is your sense of the dollar itself, do you think it weakens more? The rupee has after weakening rather rapidly from 69 per dollar to 74 per dollar has retraced all the way back, do you get a sense that the rupee is going to be around this 70 per dollar mark?
A: Yes, I think you could see a little bit more weakness, but not much. I think India like many of these other emerging market currencies have already discounted much higher interest rates in the US. Therefore, I think you are going to see an evening out of the US dollar index. You are going to probably see a flat movement and in the meantime the emerging market currencies will begin to recover. So, we have already seen a discounting of the higher interest rates in the US. Do not forget interest rates in emerging markets are moving up like you see in India itself.
Q: We are hoping that with the fall in crude prices the RBI may not have to hike yet again and will stay on an extended pause. Is that in any case your expectation that there may not be rate hikes at least in early 2019?
A: I certainly hope so. I think the rates in India are much high. I think it is a big dampener on economic development. I know the forecasts are for a little bit slower economic growth in India next year, but I hope that the RBI does not raise any more because it is a big dampener on the economy.
Q: The other big red flag may not be a dampener but we will have to see how the results come, are the elections. Does it worry you, there is a dress rehearsal with the state elections, results are due in the second week of December and then there is the big general election, results will be out in May. Would that deter you, would you want to see that result before investing?
A: I know that Modi is probably going to have a weaker showing next year with the elections because the opposition is getting more powerful. There have been a number of mis-steps in the Modi administration. So, I am not predicting the demise of Modi party, but I believe that they will rather be weaker which may be a good thing in the sense that it is a warning signal for him and the party to really push through the reforms that they promised and open up the economy more.
Q: What would you say were mis-steps, are you referring to demonetization?
A: Demonetization was one. As you know recently the idea of registration for those Indians going overseas, a number of these bureaucratic measures that have been taking place are dampener on growth and on the ability to bring money back into India. So I think these kinds of measures have to be looked at more carefully.
Q: If indeed Modi were to return and that is the base assumption now as you yourself said albeit with a lower majority, would you start looking at the pariah sectors – nobody is talking about infrastructure, nobody is talking about power, about road contractors or even for that matter real estate. Would you look at any of them, they are dead beaten depressed sectors?
A: Construction is a dangerous area. As you know, there is a lot of money that passes hands that the shareholders can have an opaque experience with. However, if you look at the real estate sector, that could be a possibility. Particularly as you said, a lot of these are very bombed out, have come down a lot, so, yes, that would be one area because let us face it, India needs housing, India needs construction, India needs infrastructure. So these are all good areas but with our focus one medium and small sized companies, we are going to have to find our niche in each one of those areas, probably suppliers of building materials to the sector, that sort of thing.
Q: Once you get the green signal from Sebi and your custodial banks, what is the kind of corpus you are looking at for 2019?
A: In terms of total assets under management, we are shooting eventually for about a $1 billion, but right now we are relatively small, we have just started. We have $150 million only. So, as we go forward, then we are going to be expanding a lot more particularly when we can get into India.
Q: I want to end by where I began, the trade war issue. What is your base case, do you think an uneasy truce prevails, do you think things get worse from here? Just draw up the tariff map and the polemics of the US-China battle over the next say 3-6 months.
A: I think the US-China battle in the next 4-6 months will get worse, not better because Trump and his team have really dug in their heels and said we want some change on the part of China. China on the other hand is also dug in their heels and saying we are not going to give away our 300 billion trade surplus to the US easily. Do not forget jobs are at stake in China. So I think it will be difficult.