‘It’s a Bull Market, It’ll Continue’
India is in a bull market and it will probably continue, said Mark Mobius, executive chairman, Templeton Emerging Markets Group, Franklin Templeton Investments. In an interview with Biswajit Baruah, Mobius said inflows from foreign institutional investors (FIIs) could double from last year. But, he cautioned there will be corrections and disappointments along the way as India still has economic problems. Edited excerpts: How do you think this new government will change India’s economic landscape? It’s going to be a wonderful, dramatic change, by which I mean a revolutionary change for India. We think a lot more opportunities would be flowing into India from an investing point of view. And, more importantly, Indian investors will get excited about investing in their own country. And one is going to see big growth in stock market investing and foreign direct investments into India. lot of new investments coming into the country. The other thing he can do, which can be done through the stroke of the pen, is to lift the restrictions on the percent holding foreigners can own in Indian banks. This again would result in much more flows coming in. It will depend on how fast Modi moves towards changing the number of restrictions that were imposed in the past by the previous governments. Which sectors need immediate attention? In banking, the past government put restrictions on the amount foreigners can hold in Indian banks. If there are changes in the norms for foreign holdings, there will be a big impact. And, in the consumer area, if the government removes restrictions in consumer retail business, one will see big inflows coming into the country, with big revival in the retailing industry. The Sensex has rallied over 25% since Modi was appointed BJP’s prime ministerial candidate in September 2013. Is it a bull market? Yes, India is in a bull market and this is probably going to continue. There will be correction along the way and there will be disappointments as India still has problems in the economy. But at the end of the day, it will continue to have a very bullish market. The Sensex is trading over 15 times its forward earnings. Are valuations expensive? It’s true the earnings growth has not been as good as it should be. But, with reforms, those earnings numbers and estimates will be revised. Valuations are stretched. So, we have to be careful because there will be corrections along the way. One must also remember there has to be revision of those earnings estimates in view of the reforms that are planned for the economy. With a new government in place, which sectors would you place your bets on? I am interested in consumer area in both retailing and production of consumer goods. And I am also interested in the raw material sector, because reforms in that sector will benefit as there are a number of projects, including production of minerals, that are held up because of various problems and government restrictions. Another area that will be quite exciting would be banking. Changes in banking regulations and restrictions will have a big impact as well. Do you expect record FII flows into the country? Yes, I believe the flows will probably double if the promised reforms take place. I also believe India can The government has to revise social budget expenditures and ensure corruption is eliminated, which will probably result in lower expenditures in the social area and more investments in infrastructure. There is lot of corruption in the social programmes and this has to be eliminated. What are the biggest concerns for global investors on India? I think there could be concerns about the currency. If the currency moves up quickly and gets too strong, that will not be good for the country. The second concern is in regards to distribution of jobs. We need to see distribution of jobs through all the states in India and not only a few states. Midcaps have received a lot of investor attention in the recent rally. What is your outlook? Most of the midcaps will become large-caps because of the growth we are looking forward to. So, I would say there will be wonderful opportunities in these mid- and small-cap companies, which will definitely go up at a much higher pace going forward. But, the economy is still not out of the woods. With inflation remaining high, how difficult will it be to revive the economy? There is high inflation because of the various inefficiencies in the economy, which is a result of various government restrictions. If one looks at the distribution system of the country, one will realise that inefficiency is the reason. So, it’s important that the restrictions are immediately changed, and that will result in lower inflation. Inflation is not only controlled by interest rates. It is also controlled by much more efficient distribution, by using modern methods and increased productivity. Sceptics raise doubts about implementation of reforms due to large-scale bureaucracy and political opposition. Do you agree? Absolutely, and that’s the reason there is a chance of disappointment if the changes don’t come at good pace. Modi has incredible challenge in front of him because there is embedded bureaucracy in the system which exists. And, any change will need strong hands and some aggressive stance to overcome these barriers. How do you think the end of US stimulus programme and hike in interest rates will impact emerging markets, including India? With the possible hike in US interest rates, the currency will get stronger and you may see inflows into fixed income investments because of the attraction of better rate. And that could have an immediate impact on EMs (emerging markets). Over the longer term, the US will have to be careful because higher interest rate could have negative impact on business that needs finance.