Emerging markets guru Mark Mobius believes the Indian market is no longer cheap but the country has been enjoying a premium over peers due to its growth prospects. In an interview with Mehul Shah, the executive chairman of Templeton Emerging Markets Group says India’s relatively strong fundamentals and accumulation of foreign exchange reserves put it in a much stronger position to weather external shocks. Edited excerpts:
The Indian stock market has received record inflows of $20.52 billion from foreign institutional investors (FIIs) this year. Do you think this is sustainable?
The combination of global liquidity, interest rate differentials and search for yields has led to higher allocations for emerging markets such as India. As a result, asset prices in emerging markets (especially Asia) are turning out to be clear beneficiaries of the quantitative easing in the developed world. As with any market run-up, investors should expect corrections along the way.
However, India remains a good medium to long-term investment destination. Also, the recent decision to raise FII investment limits in the domestic bond market should boost inflows (the government on September 23 increased the investment limit for FIIs in government securities and corporate bonds by $5 billion each, to $10 billion and $20 billion, respectively.)
What is your view on the high current account deficit in India? Is that a risk for the stock market?
India has traditionally been running a current account deficit due to a sharp rise in imports and because the economy is domestically driven, unlike other economies in Asia which depend more heavily on exports. However, strong capital flows (FII/FDI, as well as overseas borrowings by Indian companies) have helped maintain a positive balance of payments situation.
While the widening trade deficit is a concern, strong capital flows are expected to provide support. Increased domestic savings in a growing economy could also help. Looking ahead, the risks are a change in the global risk appetite and a sharp rise in energy prices, as either of these could exert further pressure on the current account.
Do you think valuations here look stretched compared with other emerging markets?
Though these are no longer as cheap, we believe the current ones are around the historical 10-year range and India has been enjoying a valuation premium due to its growth prospects. We continue to find opportunities. Our objective is to find good, solid companies that can survive even in a downturn.
India’s relatively strong fundamental characteristics and accumulation of foreign exchange reserves put it in a much stronger position to weather external shocks.
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China and India are high-growth economies. Are there factors that make India’s stock market more attractive?
Both offer good long-term opportunities and pursue different economic and political models. While Chinese companies have more state control, Indian companies reflect the entrepreneurial spirit of the private sector, which has thrived despite the various challenges. India in particular stands to benefit from the demographic dividend and the expected rise in infrastructure spending. Overall, we are excited about both Indian and Chinese companies that are expected to benefit from the long-term structural drivers.
What are the key global risks that can spoil the party in emerging markets like India?
In today’s globalised economy, a downturn in one economy, such as the US, may not necessarily translate into a slowdown in other parts of the world. If we specifically look at the US, we expect a continued improvement in its economy. However, that will be gradual. We also must be careful to differentiate between what happens to the economy and what happens to the stock market. Stock markets tend to lead economic recovery. In a bull market that we are now experiencing, there will be corrections. We have to be ready for such short-term volatility.
Emerging markets have rallied over the past year and investors might be tempted to take profits, which could lead to short-term market corrections. That said, we expect these kinds of corrections in emerging markets and rather than focusing on when one might happen, we focus on buying and adding to investments that, in our view, have dropped to compelling valuations as a result. Overall, I am positive on the long-term outlook for emerging markets.
Volatility resides in all markets and bad times can be good times for investors. Which is why we always emphasise the importance of bottom-up research and looking at stocks on a company-by-company basis.
