Mark Mobius, known for his value-investing style and deep understanding of emerging markets, currently heads Franklin Templeton Investments as its executive chairman, Templeton Emerging Markets Group. He shared his views with Jitendra Kumar Gupta on various issues, including Indian markets, benefits from the country’s changing demographics and key risks for emerging markets. Edited excerpts:
What’s your view about India as an investment destination?
We expect the Indian equity market to continue attracting interest from local as well as foreign investors. This is because India’s economy is expected to continue to record sustained economic growth. Over the long term, the growth rate of India should offer a good platform for Indian companies to deliver stellar results. India has one of the largest populations in the world and, thus, represents a huge consumer market. Moreover, with half of India’s people under the age of 25, India will continue to have both a strong labour force and large consumer base — important factors which should support the market’s recovery in the future.
What are the themes or sectors which could do well in the long run?
Our focus has been on the two C’s, consumers and commodities. Low penetration and increasing demand for consumer products and services in Asia point to tremendous potential for consumer-related India companies, as per capita income and spending power continue to rise steadily in the region. We look for opportunities in areas influenced by the consumer, including automobiles and retailing. Consumer banks are also likely to benefit as they tap into the millions of people who do not yet have a bank account but are likely to move into consumer loans and, eventually, credit cards.
We believe investing in commodities companies offers another way to take advantage of expanding demand and access the growth trajectory of India, where high economic growth is resulting in greater demand. We believe the global demand for commodities could outstrip supply over the long term, resulting in an upward trend in commodity prices. In this area, we are looking at companies that are strong in the production of commodities such as oil, iron ore, steel, aluminium, copper, nickel and platinum.
What is your view on the impact of higher commodity and crude oil prices on corporate earnings in India, especially in case the Reserve Bank raises interest rates further?
High inflation could hurt earnings for some companies dependent on certain commodities, as ability to pass on cost increases is muted. Higher interest rates will reduce the relative attractiveness of equities and also impact growth and earnings for some companies.
The Sensex has corrected recently. What is your view on the current valuations? Are the worries in terms of interest rates and commodity prices fully factored in?
If the rates continue to rise, they would certainly impact valuations, going forward.
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Are India’s relatively higher market valuations vis-a-vis other emerging markets justifiable?
Despite relatively higher valuations as a whole, the Indian market still offers some attractive opportunities. The key is to focus on individual companies.
Many believe issues pertaining to developed countries such as high sovereign debt, currency risks and the impact of stimulus could pose a renewed threat to emerging markets. Is this likely?
While one should be aware of developments in the global economy, it is important to note that the Indian economy is still not as dependent on external economies as many other markets. This is partly due to its huge domestic market.
However, this is not to say that global events will not affect the Indian market. There will be some contagion. Hence, it is important to carefully research and understand the investments you make. More, one should always take a long-term view towards investing. This allows investors to see past the short-term sentiment and focus on the fundamentals.
Could you highlight some key risks which could impact emerging markets and on which to keep an eye during the current year?
Emerging markets, like most other global equity markets, will, of course, experience corrections along the way, since they are likely to be subject to significant volatility, given the prevalence of short-selling, the increasing use of derivatives and the expansion of markets globally. Other potential risks include inflation and sovereign debt issues. Managing inflation without endangering economic growth is a complicated and difficult problem, which will continue to pose a challenge to emerging markets in 2011. The other factor is the default possibilities in Europe and what it implies for other countries around the world.
What is your view of the recovery in developed markets like the US and Europe? Will a recovery there lead to fund outflow from emerging markets like India?
While the US economy is beginning to show signs of improvement, the euro zone is still struggling with debt issues. Thus, confidence in Europe is still lacking. Emerging markets are expected to grow at about three times the rate of developed markets and, hence, we expect even more money to be diverted to emerging markets such as India, as opposed to seeing outflows.
