Much before emerging markets became a fashionable asset class, Mark Mobius, executive chairman of the Templeton Emerging Markets group, was backing them in 1987. Mobius is today one of the world’s most renowned value investors, overseeing over 50 funds across 18 different countries. Catching up with him on a recent flying visit to Chennai, we found him to be quite bullish about the prospects for India, despite recent events that have roiled emerging markets in general.
After the recent crash in emerging market stocks, a lot of commentators have said that the emerging markets (EM) story is unravelling. But you’ve taken a positive view of EMs even after the recent declines. Can you explain why?
If you look at equity market activity around the world in the last 10 years, the emerging markets have outperformed the US market as well as the global markets in seven of those 10 years. Yes, it is true that in the last few years we’ve seen underperformance by emerging markets. But emerging markets have begun to offer value after their recent falls and many global investors are beginning to recognise that.
But markets are usually volatile and therefore they’re not a good reflection of what’s happening on the ground. If you look at the economic growth of emerging markets, even with the problems in Russia and Brazil and so on, the reality is that emerging market economies are now growing at an average rate of 5 per cent. In the case of Asia, the average growth is 6 per cent. That’s three times more than the US rate of growth and the global rate of growth as well. Most importantly, the two most populous countries in the world — India and China — are growing at 6 or 7 per cent. If you know this, you will know that emerging markets are not yet dead.
I know, many people have bemoaned the fact that China is slowing down, but I don’t understand this worry at all. It’s the second-largest economy in the world and it’s growing at 6-7 per cent! A lot of people forget to look at the absolute numbers. In 2010, China’s economy was growing at 10 per cent and roughly $840 billion was added to the economy every year. In 2013, it grew at 7.7 per cent, but then over $900 billion was added to the economy because the base was so much larger.
Hasn’t the commodity price meltdown also affected the prospects of emerging markets?
Yes, it has. But here again, the impact of commodities on emerging markets is misunderstood. Commodity price declines have affected economies both in a good way and a bad way. Yes, Russia and Brazil are affected negatively by the commodity price decline. But both China and India are positively impacted because they are net importers of raw materials. In fact, we have calculations that show that about 70 per cent of emerging market countries (by GDP) have benefited from the commodity price meltdown.
There’s another reason to be positive on emerging markets, too. There’s a direct link between inflation and interest rates. The recent commodity price falls have reduced inflation and interest rates are coming off. That’s good news for equities.
What’s your view on China after its recent stock market collapse?
We were quite negative on the market when the Chinese stock market index was going up very rapidly. I was saying there’s a possibility of a fall. I was actually asked how much Chinese markets could fall and I said 20 per cent. Then, people would say — ‘20 per cent! No, that’s too much.’ But the market has fallen over 30 per cent and then I look like a genius. But you didn’t have to be too smart to figure out that the Chinese market would fall. But the problem really is that the government then stepped in to support the market and that sent out confusing signals to global investors.
Unlike India, in China, the bubble was fuelled by retail investors taking leveraged bets on the Shanghai market. Isn’t it so?
Yes, a lot of this was plain and simple gambling. You see, the Chinese government, in its anti-corruption drive, really cracked down on other forms of gambling. That stopped the high-rollers from going to Macau. The stock markets saw a tremendous inflow of money. You see, in China everyone watches the government very closely. So, when the government says we want the market to go up, everyone rushes to the market.
Is China succeeding in rebalancing its economy from an export to a consumption-led economy?
Yes, I do think so. It can’t happen overnight. But when I visited China recently, I visited this 1.7 million square metre mall — the Chengdu mall. It had this water park the size of an ocean almost. It was filled with people, though you had to pay an equivalent of $25 to get into this. That shows the hunger for spending, for entertainment, in China. But this readjustment of the economy will see its growth come down in the short term. India, with a younger population, has a better shot at higher growth.
What do you think of the recent Chinese move to allow the renminbi to depreciate?
I was really surprised by the way people got excited about this 2-3 per cent depreciation, terming it this big devaluation and so on. After all, this was a year in which Thailand saw its currency depreciate by 30 per cent. But I think this again signals a move to a market economy. The government wanted to move in this direction and opened the door a little bit and then there was this volatility and everyone got worried. I don’t see how the Chinese currency can see a big devaluation because there’s a lot of demand for the renminbi globally. If they want to be a reserve currency, they will need to open it up.
What’s your view on India? We have a lot of good intentions on reforms, but actual progress seems to be slow.
We do see the intent in India. This government has clearly stated that they want to drive growth and reforms. You should recognise that this is a first.
Previous governments were not so clear about the direction. One of the most significant reforms in India, I believe, will be the unified value added tax (GST). That alone should save businesses in India billions of dollars over the long term in the form of taxes, time and inefficiencies. It should also eventually lead to a decline in inflation.
Today, doing business in India is like doing business across 29 countries, with each State having its own rules, taxes and so on. But if that is no longer the case, there will be an incredible impact. The faster this gets done, the better.
People often ask me — How much money do you want to put into India? I tell them — Today the US stock market is about $12 trillion in market capitalisation. The Indian market is just $2 trillion. But with the Indian population, the Indian market cap should be $20 trillion. Foreign investments should be a hundred times more.
If India had fewer restrictions on foreign investments, the inflows would be enormous. There’s actually no shortage of money which could flow into India if the doors were open. The confusion on taxes is also an issue.
When foreigners come in with long-term investments, they want to know that the government won’t change its mind on taxes. If these issues can be solved at the highest level, the money will flow like crazy.
The Templeton group is a great believer in value investing. But why have value investing strategies had such a difficult time in the last five years?
The reason for that is that internet stocks today make up a good proportion of the market capitalisation. Internet stocks generally trade at much higher valuations than normal stocks and that has pushed up the overall market valuations. And because of the out-performance of the internet stocks, traditional value portfolios have not done so well.
Value investors look at many parameters - dividend yield, price to book value, replacement cost. What does Mark Mobius look for in a stock?
We look at return on capital employed as the most important parameter. You give a company a lot of equity and debt and you want to make sure they are earning a decent return on it.
With companies that earn low returns of 3-4 per cent, we would like to see them returning cash to shareholders. We also look at the quality of management.
This is something that can’t be measured, but it is very important. This is a strength that India has.
It has some terrific managers. If we are able to free up regulations you could have world-class companies. Already many global companies are run by Indians. After all, Pepsi is run by an Indian woman.