Global deflationary pressures biggest threat: Mark Mobius

Interview with Executive chairman, Templeton Emerging Markets Group, Franklin Templeton Investments

Mark Mobius, executive chairman, Templeton Emerging Markets Group, Franklin Templeton Investments, tells Puneet Wadhwa that Asian markets are not in a bear grip, but that he expects a bond market rout if the US Fed increases rates sharply. India still remains on his ‘buy list’. Edited excerpts:

What is your interpretation of how the global financial markets have played out this week?

As far as the decline seen this week is not as big as we saw in 2008. At that time, the markets came down by 67%. This decline, however, is about 26% if you look at the total returns. And on price basis, it broke the 30% downward barrier.

 

If you look at the markets since 2009, they have been moving in a sideways direction - for emerging markets at least. We now have to wait and see if it breaks through this band we have seen in the emerging markets (MSCI EM) index, which runs from around 800 - 1,200 band. If it breaks down below the 800 mark, we can then probably see a further decline.

What kind of downside do you foresee in the markets?

The Chinese central bank, the Peoples Bank of China (PBOC), has lowered interest rates and also cut the reserve requirements for banks. This can boost the markets in the short-term, but a lot of people might still be confused and will continue to sell.

There are a lot of things globally that are putting people on  edge and are confusing the markets. The markets hate uncertainty, and now in the US the talk by Janet Yellen of the US Federal Reserve about raising interest rates is beginning to be questioned because of low rate of inflation in the US. So there is a lot of uncertainty. On one side, Yellen has said the Fed would raise rates by the year-end.

At the same time, the Europeans, the Japanese and now the Chinese are getting more sceptical about the markets. So this kind of uncertainty tends to result in people sitting on their hands and not doing anything, or at least liquidating long-end US dollars and waiting for this uncertainty to clear. That’s what we are seeing right now.

What has been your strategy in this market turmoil?

In terms of our outlook, we are interested in buying a few stocks and if the markets go down, it will be a good thing for us. The problem is that stocks generally are not cheap. We are not seeing 10x price-to-earnings (PE) ratios, 3% dividend yields or that sort of opportunities very much in the markets. So, we have to be very cautious looking at these things and deciding where to go.

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Do you think the rally on the back of moves by the PBOC be short-lived?

Yes, I think the rally will probably be short-lived. There is no question that the Chinese economy is slowing, but for an economy of that size, if it’s still growing — even if it is at five per cent — it still is a good growth.

India should be a good place if it brings about its reforms. Globally, euro-zone and Russia are still problem areas. The good thing is that a lot of devaluation we have seen in these countries is over, given the large movement in their currencies. There is still some more room for a decline. Looking at all these factors, we still need to be watchful and very careful in looking for opportunities for buying good stocks at low prices.

Are the markets in Asia, especially China, in a bear grip now given the fall from their peak levels?

I don’t think so. A bear grip is defined as when the markets in general have declined 30 per cent or more, and we haven’t seen that yet across most markets. At this stage, volatility is quite high. We saw General Electric fall nearly 20 per cent in the US markets recently and then recover. Such volatility is very high globally because of program trading, derivatives and leveraging etc. So one needs to be very cautious of this volatility as well.

What would you now do as a longer-term investor across various equity markets? What would you be buying what would you be selling? Which markets?

We are done with most of our buying and are sitting on quite a lot of cash in our portfolio. We are not buying anything aggressively. We are looking at some Indian stocks, some stocks in China that have come down. But it is mainly in the financial and the banking sectors. I am now also looking at Korean stocks; but the overall numbers are not that attractive in that way that they look very-very cheap and bargain buys.

So how much cash do you hold in the portfolio?

Since the volatility is very high, we are 20% in cash right now.

There were some views that bond markets could be the next bubble to burst. Do you agree?

If the US Fed makes a sudden move and raises the interest rates dramatically, we can have a real rout in the bond markets. Most of the bond investors have probably moved towards the short-end so that they are able to adjust their portfolios depending on what happens with the US interest rates. So bond markets are on edge.

Are the developed markets, too, at risk of a sharp fall or are they still a safe haven compared to the Asian and the other emerging markets?

If you look at the overall volatility, the Dow Jones Industrial Average has been quite stable. But we had a big fall recently, which rattled even the American investors. So there can be instances of volatility, but normally, people use the US as a safe haven. The Dow Jones falling 16 per cent in a day is one heck of a move in a single day! Though not as volatile as the emerging markets, such moves frighten people. And I would say that anyone looking at the Dow Jones chat would believe that the markets are heading lower and a bear market territory. But generally people see the US as a safe haven because of the US dollar.

Are we getting close to a full blown currency crisis?

The only way one can get to a full-blown currency crisis is to have a crisis in the US dollar, because the US dollar is the main reserve currency. But I don’t see that happening at this stage. The only danger we face is the deflationary environment, which is bad for everybody.

As regards commodities, are we in for a prolonged slump in prices?

The slowdown in China is very bad for commodities and we are not going to see a quick turnaround. But please remember that these commodity prices are much tied to the emotional framework you see around the world. People are very emotional about prices. If you take oil as an example and ask why the oil prices will go down by 20 per cent or 30 per cent when the average annual growth and production is about one per cent and the actual range within one year (plus/minus) five per cent in terms of demand. So it is all about sentiment that applies to prices.

What are your views about India?

When Modi was elected, everyone was excited. But we knew that once he got in, it would be difficult for all the reforms to get implemented. However, the direction remains good and any steps that he can take in the right direction are fine with us. So we want to make sure we stay in India and we have very high hopes from India; and we can buy some good bargains in India. It is a place we are looking very closely at right now.

So have you found any good bargains yet in terms of sectors and stocks?

Yes, we have located a couple that we may be buying since it is an opportunity for us. I can't tell you what they are though!

How do you think that the Reserve Bank of India (RBI) react to the global situation in terms of an interest rates and the rupee?

I think they will remain very cautious. The RBI Governor is very cautious and the way economies are slowing down, he could take measures to try to block that by lowering rates and other policy measures so that the Indian economy doesn't get stuck in a downward spiral. But I don't foresee any dramatic moves at this stage, but a lot will depend on what happens in China.