Inflation no damp squib for stocks, India in a sweet spot: Mark Mobius

The founder of Mobius Capital Partners is bullish about emerging markets, particularly India, despite equities going through a turbulent phase and a tough competition poised by debt

By Nasrin Sultana

Published: Nov 2, 2023 05:16:57 PM IST

Updated: Nov 2, 2023 05:30:03 PM IST

Mark Mobius, founder, Mobius Capital Partners Photo: Bajirao Pawar For Forbes India

As factors such as the geopolitical crisis and high yields in the US are taking the wind out of equities, the confidence of Mark Mobius, founder, Mobius Capital Partners, on equities remains unwavering. He feels that India is the market to be in—to reap higher return on capital—as the country is a land of opportunities and innovation, with the potential to play a pivotal role in the global financial arena.

Taking the current downturn in equities not as a source of concern but rather an opportunity, Mobius has increased his exposure to Indian equities and is confident to raise his stakes higher despite the election-led uncertainties. He sees the 30-share index Sensex at 100,000 within five years with a firm belief that the newly elected government will continue with reforms and business-friendly reforms.

“If you look at the Indian situation from a global perspective, India is in a pretty good spot. I think India is going to be in good position,” he says.

According to the seasoned investor, even as inflation has been a nagging issue worldwide, it is another good reason to invest in stocks because stocks will adjust for inflation, which is important for investments. He feels the withdrawal of foreign institutional money from Indian equities is likely to be temporary. Edited excerpts from an interview:

Q. You have been a big fan of India and emerging markets. But we are in the middle of a crisis-like situation with war, commodity inflation and rising interest rates. How do you position yourself in India?

We still think that India is the top market which has got great growth potential. The headwind will be interest rates, but if we select stocks that have low debt, no dependence on outside debt, then we should do very well. The important thing is to avoid stocks with high debt because those will be in trouble.

Q. What is your exposure to India at this moment?

Exposure is high. India has the second-largest exposure in our portfolio. It has been high, will remain high and may probably go higher.

Q. What gives you that confidence in India? The country is heading into an election phase which is generally volatile for equities. And there is a raging inflation too.

Inflation is a problem worldwide, but if you have high inflation, it is another good reason to be in stocks because stocks will adjust for inflation, which is important for investments. The other thing is that if you look at the Indian situation from a global perspective, India is in a pretty good spot. I think India is going to be in a good position.

Q. What about the upcoming elections? You said your exposure to India is going to go higher. Does it mean the elections don't give you the jitters?

The election situation is clear to me, at least, that the BJP will still be at the top. The BJP policies have been good for enterprises. They encourage companies and boost the economy. They encourage infrastructure spending. All of that means that it is not going to change in the next few years.

Q. What about policy stagnation whenever there is an election?

Whenever there is an election, we have to watch who’ll be the winner. Now with election bonds, there is going to be a lot of money. Election bonds are going to be in big use in some way. You will see a lot of spending as a result of these bonds. They are opaque, so nobody knows who is making these expenditures, but it is pretty clear that probably the big businesspeople who want to see the BJP continue in power will probably be the favourites. Actually, these election bonds will be beneficial to the economy.

Q. Why is that?

Because the target of the political parties will be the rise of the paddy farmers’ population. So, money will be distributed which will be good for the economy. In some ways, the impact of this money will probably be positive on the economy.

Also read: Why are FIIs fleeing Indian stocks? Blame it on bonds

Q. Though you are optimistic on India, FII (foreign institutional investors) money is getting drained out of Indian equities and even in the debt markets, the contribution is small. This comes at a time when the US bond yields are spiking. Your comments.

Money has been definitely diverted because a lot of bond investors are asking: ‘Why should I go into the equity market—be it the US or India when I can get back 4 to 5 percent of my money in debt?’ It’s going to be a hiatus of money coming into India, but it will be temporary. I think the important thing going forward is for the government to make it easier for foreign investors to come in and make the procedure very smooth and easy, so that you can have money coming in.

Q. And what would that entail?

That will be rules and regulations for individual investors to be allowed to enter. I know that the government is concerned about overseas Indians complaining about that, but they should not worry about that. They should be allowed to come in. You know the important thing is that if you close the door, people will not come in.

Q. Over the last few years, there have been many new regulations to welcome foreign investors into India. Even then not many FIIs are attracted to India.

If you look at the numbers, a lot of FII money came in due to relaxation of norms. Now, of course, there is the interest rates hike complications, but that doesn't mean that these measures are not going to be effective. They will be effective.

Q. In your equity markets portfolio, India is at the top. How do you rate the other countries?

Taiwan is high on the list. Korea is high. But there are not many countries that can match the potential of India—be it simply because of the size of population and its potential size. India is going to be a real leader.

Q. Do you have an exposure to the US?

Yes. And there are lots of companies in the US that have businesses in emerging markets. Because a majority of the earnings are coming from emerging markets. Those are the companies we are looking at.

Q. In terms of exposure between the US, India and Europe, where do you peg India at?

In emerging markets, India is higher. US will be very small.

Q. What kind of factors would compel you to change your exposure or stance on India?

If there is a big change in government. Those are hindrances or risks.

Q. Any other macro factors?

Not really. I can't think of any other factor with that. You must remember what your life's markets are. Three enterprises are a capitalist orientation. And that results in creativity and innovation and technology. That's really what we're looking at.

Q. What about currency?

The Reserve Bank of India has done a pretty good job in stabilising the currency, at least making sure that it is not volatile. There's no question that the currency has weakened over the years, but it hasn’t been that significant. I think going forward, if India continues to attract foreign reserves, then the currency could get stronger against the dollar.

Q. In the last few years—from 2019-20—there have been a lot of new-age technology-based companies. Some of them were listed on stock exchanges via IPOs. Valuations of these companies were steep, but soon after the listing, the stocks went through major corrections. How would you value these new companies?

You have to go back to front levels. You know, many stocks that came to the market had no good reason other than people getting excited about the brands and concept. But these companies have high debts. Their earnings growth was not good and return on capital was weak. So obviously, these companies were not going to do well. There may be an initial spirit of excitement. Then it dies off and people lose money. It is important to keep away from these concept stocks. I'm not saying you can't make money. Yes, you can. But you can lose an awful lot as well. It is better off with companies with solid foundations.

Q. How do you assess those companies when their business is new and not enough financials are available in their documents?

The factors I mentioned: Return on capital and low debt. Also look at the people who are running these companies. What is their background? What kind of a company do they run? What kind of corporate governance do they have? These are important factors to look at.

Also read: Are weak rupee and rising oil big challenges to India's stock rally?

Q. When these new-concept brands come to the market, they look delicious in terms of brand connectivity and popularity. But some analysts start assessing them by 10-15-year projections. Is that the right way to value them?

Very difficult. The important thing is if the company has shown consistent growth in a five-year period track record, return on capital 20 percent, debt-to-equity less than 50 percent, earnings growth at least 10 percent. Then you have some foundation to think that the company will continue on that path in the next five or 10 years. That's the way to look at it. Don't try to say, ‘Hey, this concept is terrific. Okay, the company is a big debt’, but it doesn’t make sense. Bet on the company's metrics, look at the record. That's important.

Q. Post Covid, a lot of things changed, even in the way people were investing. In the US, there was rise of the Robinhood, and in India, real participation swelled. But now the tide has turned again, at least in India where inflow through mutual funds is rising and not direct investments. How do you react to that?

I think in development and India, the model will be similar to the US—in the sense that mutual funds, ETFs will become very, very big. I don't know what is in the US, but I guess this is about 50-50. Like 50 percent of the market is into individual stocks, 50 percent into passive, ETFs and future funds. I think that's the direction that you're going to see for the Indian market. You will see more and more individuals investing, new investor participation in the stock market.

Q. During Covid, social media’s reach and impact increased tremendously, influencing stock markets worldwide. Similarly in India, there are a lot of social media influencers giving stock tips, talking about certain stocks. What’s your opinion about that?

That's an important point because as you rightly said, social media is having a bigger impact on markets. We know some investors who rely totally on social media to get stock tips. A lot of people, you know, get into social media and somebody says, ‘Hey, let's invest in that stock’ and they probably believe in that. One aspect of our research has to be to looking at social media. What is the social media saying? Because that will give us an indication of the direction of where markets are moving.

Q. Do you think a strict regulation is required for social media influence on the stock market? And I'm not talking only about influencers.

I don't think it should be regulated. India is a democracy. There's no way you will be able to stop that flow. You are better off not regulating and warning people that it is not Regulated, but you’ve got to be aware.