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'Modi government's emphasis on empowerment rather than hand-outs is very good.'
'In the global banking world Rajan has probably been the best.'
Termed as "the pied piper of emerging markets", Mark Mobius, executive chairman, Templeton Emerging Markets Group, is positive on India and believes the Indian economy is on a strong footing. In an exclusive chat with Vishal Chhabria and Sheetal Agarwal, he talks about the themes he likes in India, other emerging markets, impact of global events such as Brexit, Fed rate hike on global economies. Excerpts:
Within the emerging markets which are the ones you would bet on?
India of course is very exciting. We believe Brazil will recover from the low points so we think investments in Brazil makes sense at this stage. There will be corrections along the way but generally speaking it is a very low point in Brazil right now.
And if Russia sanctions are lifted and Brexit does happen, it could be positive for Russia. Because then a lot of the East European countries who are members of the EU will feel it is possible for them to become more independent of the policies of EU. So it would be quite good for Russia.
Among emerging markets, are you increasing weight of India in your portfolio?
Yes we are increasing weight of India. We have about $2 billion plus investments in India and we want to increase it. Given the fact that the country is growing and with the on-going reforms, banking is the obvious selection to begin with.
And some of the conglomerates, companies that are involved in a number of sectors and getting a wider exposure of the markets will be another area. We also like technology and pharmaceuticals.
Bad loans in PSU banks have been raising leading to questions on whether these banks can absorb these write offs and start growing. What's the reason you like banks?
The good news is that these bad loans are now being revealed. The government has said that lets come clean, lets be honest and reveal what we have and then we go about correcting it. That is a pretty healthy environment for the banks.
That's the reason why we think it is good sector. We have a mix of both public and private bank stocks in our India portfolio.
Globally, there are many concerns with China slowing and US Fed rate hike even as US economic data is a bit choppy. How do you see these events playing out and its likely impact on global and Indian markets?
The perception is different from reality as regards to China. China at 7 per cent growth in dollar terms is producing more growth than when they were growing at 10 per cent because the base is much larger. I think a lot of people are not using the right terminology when they are saying a slowing China it is a decelerating China.
I believe the markets have got it all wrong. Most commentators look at the debt levels in China which are almost as high as the US and they get alarmed. But they forget that China is a planned economy.The government controls major strings of economic power. They own the major banks and they have huge foreign exchange reserves.
They have many stop gap measures to be able to handle any debt situation that may arise. It is true they are moving towards a market economy model which means they want to see some bankruptcies. So the market can allocate capital more effectively.
But they will not allow this to turn into an all and out rout like you had the sub-prime in the US. And even in the case of sub-prime as you know, government stepped in and bailed everybody out. This is something I am not worried about.
With regards to the rate hike, it has been discounted by the markets maybe 2,000 times already. Basically these central banks including the Fed are running out of ammunition.
They have been given an impossible task of creating economic growth. This is not their function and this is not something that they are able to do. Interest rates are not going to affect that one way or the other.
It is the government policies and reforms that would really create this change. And the Modi government here in India realises that. I think they have articulated that very nicely.
With the Fed rate hike which economies will witness slower inflows?
I think it is very well discounted and the direction of many of the emerging markets is in the opposite way. Opposite from what US is doing. In many of these markets, interest rates are actually being sustained or even being trimmed.
So it depends on the individual situation going forward. I believe a small change in the interest rates in US will only have a psychological impact, not a real impact.
You must remember that rates are still so low What can we expect from the Fed? A quarter per cent, half a per cent? You are still not having a big impact.
How high is the likelihood of a Brexit actually going through? What will be the after-effects of a possible Brexit on both developed and emerging markets?
First of all it will probably come as a big surprise if the British vote to exit and it will come as a big shock in many directions. It will have a big impact on Europe obviously and the impact on Europe will reverberate around the world.
All kinds of ramifications - in trade, in politics, in currencies, in markets, etc. London as a financial centre will probably be threatened and they will have to find a new center somewhere in the world. This will have a big impact. I think they are playing with fire, frankly.
How do you rate the two years of Modi government?
The continuous movement at every level of the government has become quite evident and when you put that all together, you realise that the impact is going to be significant. The emphasis of Modi government on the low income segment of the population is very good.
I believe it not just a populist move but is also a key element in making the Indian economy healthy because you are creating a whole new generation of consumers and people who are becoming more productive.
The Modi government's emphasis on empowerment rather than hand-outs is very good. The identity card movement is also very positive.
Any misses?
We would like them to go ahead with GST but we realise that their hands are tied with the Congress not supporting it. At the end of the day the fact that they are moving in that direction and are close to implementing it is going to be very good. That will have a positive effect on corporate earnings.
Do you think Rajan has done a good job? Should he not continue, what signals will it send to those outside India?
In the global banking world Rajan has probably been the best. He has been the voice of reason and logic.
We hope we can keep him on. If he is replaced with a politically-oriented person then the reaction will not be very good. But if it is somebody with a good reputation and who has a history of independence, then it should not be a problem.
US Fed is expected to increase rates and here in India the trajectory is down. So the spread is narrowing and FIIs are pulling money out of Indian debt. How do you see things playing out?
This trend will continue. As long as you continue the reforms of the financial system and make it more transparent and efficient then rates will come down. If you see a more efficient productive society with less restrictions, your inflation will come down and interest rates will fall.
This should have been done a long time ago. The emphasis of the government on the less fortunate segments of the society is very critical. The fixed income side will see some impact.
The government believes 8% GDP growth is possible this year. Do you think it is achievable, and how reliable are GDP numbers given the earlier debate over its calculations and now that people are complaining that not much is visible at the ground level?
It (8 per cent growth) is quite possible. I can see India growing at 10% in the next few years if reforms continue to kick in. I don't buy the argument that GDP numbers are fixed.
The people who do these numbers are trained economists and have been trained by the World Bank. A lot of people look at these numbers. I believe the numbers are reasonably accurate, give or take half a per cent.
Is the rally in crude oil and other commodities sustainable?
I believe crude oil price can touch $60 a barrel while metals can give 10 per cent returns this year. We are already seeing bottoming out of the commodities.
The over-supply of crude oil will be corrected in six months’ time. There is no question in my mind that demand and supply will find a balance.
Photograph: Sukree Sukplang/Reuters
