‘India will outperform’: Legendary fund manager Mark Mobius says high rates don’t always hurt stocks

Mark Mobius, a veteran emerging-markets investor and co-founder of Mobius Capital Partners, has said that the world will have to live with high-interest rates and that this doesn’t mean the stocks will be affected. The legendary investor spoke to Udayan Mukherjee, global business editor, Business Today at a time when the global financial markets are in a state of turmoil, and the central banks across the world are trying to tame inflation by hiking rates. 

Edited excerpts by Shagun Walia.

Q. This is not just the first bear phase that you are witnessing in your career, you have seen so many of them. From 2008, the global financial crash to the tech bust in 2000. Where would you rank this period in the scheme of the great problem patches that you have to negotiate in the stock market over the last many decades? 

Well, this is relatively mild, when you look at it from the perspective of history. You must remember we were dealing in the markets in Brazil when inflation was 2000 per cent and in Argentina and places like that. The history of India also was checkered in those areas and of course, you had the Asian financial crisis, which was very severe. So, I would say this downturn is relatively mild at least at this stage and we can pretty much handle them.

Q- The caveat in your answer is at least at this stage, the fear is that it might be looking mild now. The way central banks are acting, it might get out of control very easily, next year. What would you say is the probability of that?     

I think the good probability of higher interest rates is still there. The Fed in America leads the world in terms of interest rate hikes, except China. But, if you look at the Fed, they desire to tame inflation, which is now running the CPI at about 8 per cent. Their playbook says if you want to tame inflation, interest rates have got to be higher than 8 per cent. That means they are going to 9 per cent. So, when you talk about 3-4 per cent. It is a big problem. Things will go much higher if, CPI stays at this level.

Q. So, do you think that the Fed is panicking about inflation at this point in time? It realises that it might have made mistakes in the last year, trying to compensate for it.

Yes, I think they realised it late. They should have moved much earlier. And, now they are trying to catch up. The problem they are facing, however, is that unlike in the past, they didn’t have cryptocurrencies running around. I had a recent trip to the US, visiting various states and people are spending like crazy and one of the reasons is of course that they still have money leftovers, from the handouts. They have taken place from the COVID crisis. The current administration releasing oil from the strategic oil reserves means that gasoline prices can come down. And, that makes people very happy and very rich in America because gasoline is very important. Don’t forget the cryptocurrency, it probably represents 2 per cent of the money supply and the velocity is very high and people are spending. Another interesting note in America is that the unemployment rate is so low that we have noticed a lot of companies and restaurants are looking for people. They are not just around. What does that mean? That means people don’t want to work. They have got enough money to spend and live without having to work. So, it is going to be very difficult for the Fed to tame inflation in my view.

Q. You have a long memory, Mark – and you have been around financial markets in the 1970s. At that point, inflation reigned for many years, and the Fed was unable to tame it. And, all of us have read how bad at that time the economic and financial markets were then. Do you think what you said about inflation, we are at risk of that kind of protracted inflation? Or would it be alarmist to think about it at this point? 

I think it is not alarmist to think. We have to live with high-interest rates. And, by the way, high-interest rates did not necessarily mean a downturn in the stock markets. It can be temporary, of course, as the stock markets are now reacting negatively to the possibility of higher rates. But, if you look at history, the stock markets were able to do well even with high-interest rates. That means, you got to find companies with pricing power, they are able to raise prices, with higher inflation. But there is no question that Fed got much higher and that could have more pain ahead. Provided that the CPI stays at this level and even goes higher. 

Q. Your point is not necessarily about a stock market downturn, but the way interest rates are going up this time, it seems most economies may go into a recession. And, that has ramifications for the stock markets at least for the foreseeable future. Do you see that as a real risk? Do you think recession might be averted in some of the major economies?

Yes, I mean. I think the possibility of recession is definitely there. In fact, if you take the official definition of recession, we are already in a recession in the US because you’ve had two-quarters of negative growth. So, we are in a recession but a recession does not necessarily mean that people feel poor. You’re going to find that these two things are quite different in many ways.  And, yes, the recession is hitting companies. 

Q- What does all this mean for currencies, Mark? I mean the stock market is one part of the equation but you know there is a huge flux going on in the currency, well. In London, the pound has collapsed over the last one month. We are seeing many such reactions even in the Euro versus the Dollar. How do you think this part of the equation will play out between the Dollar and the other major currencies? 

That’s quite remarkable when you could think about not only the pound sterling but the euro, where the euro went, it’s quite remarkable. What does that mean? It means that imports for these countries in Europe and the UK have become a lot more expensive, and more difficult because usually these imports are denominated in dollars. It means that the US, of course, can import a lot more cheaply and, the rest of the world of course is under pressure because you see all these currencies are weak against the US dollar. 

The Indian rupee has been holding up fairly well but, if you look at other countries it’s been pretty much of a disaster for many. You must remember that even in situations like this you have companies that can do quite well. For example, in Turkey companies that can export and receive dollars and their costs are in Turkish lira, which is evaluated massively against the U.S dollar. These companies can do quite well. So, it’s not a complete disaster for everyone but certainly, something that’s quite remarkable, when we see the major currencies decline against the US dollar to such an extent.

Q- The fear at such times is that one part is how the macro plays out and the other is what is going on in the world of interest rates, in the world of currencies that at some point part of the world there will be a financial accident. You know this kind of collateral damage. Do you see the fear of that? Some kind of accident, which dislocates the system and something like a 2008 situation pans out? 

Definitely, when you see prices move in such a remarkable fashion, where interest rates and where currency rates move in such a fashion, then there’s a possibility of a big accident happening. I know, you’ve heard rumors about Credit Suisse being in trouble. Yes, it could happen where Credit Suisse has been gambling on farm reserves, on currency, interest rates in some ways, you know with all these derivatives. Banks can get into big trouble if they play with these instruments. So, yes there’s a possibility of an accident. I’m not saying that Credit Suisse is in trouble but I’m just saying that you could have a major bank like that having a real problem and then that would create a panic.

Q- What about geopolitics? The Ukraine war has been raging for some time now. The market might have priced in quite a bit of it. Where you sit, there is always the China-Taiwan thing that is simmering. Do you think something might explode on that front and bring geopolitics back into play, as one of the key risks for the market, sometime in the next few months?

Well, I think it’s a very important point you make and that is that these geopolitical issues are really at the top of the agenda. I mean, we can talk about interest rates; we can talk about the stock market etc. But, when you have a war going on in Europe and the possibility of Russia using nuclear weapons, then you really got a crisis that could wipe out everything that we’ve worked for the last 50 years. So, it’s a real problem and of course, the China-Taiwan situation has simmered down, and has quietened down a little bit, but there’s no question that continues to be an issue going forward. 

I don’t see the Chinese taking military action against Taiwan in the foreseeable future. But, the threat is always there and particularly if Russia is successful in Ukraine then it might encourage other countries to try out the same thing.

Q- What are your thoughts on China, Mark because you know we’re talking about a global economic slowdown? The numbers coming out of China over the last quarter or so are not very comforting. Where do you stand on how China, the Chinese story will play out in the next year or so?

First of all, you can’t ignore China, it’s exactly equal to or a little more or less than the US economy. So, you just can’t ignore China and you can’t ignore Chinese companies, you continue to look at Chinese companies and see where the opportunities are. 

But, as you mentioned some of the numbers don’t look very good. They should know that they’ve had a property or housing crisis recently and one of the reasons why Chinese investors are somewhat depressed is that most of their assets are usually in property, not in the stock market and, when property prices go down, they feel poorer. So, all of these issues including the COVID lockdown have hit China, foreign investors have been burnt badly. American investors had a lot in China as you know the Chinese market represented or still represents about 30 per cent of the major indices and over 50 per cent of investors in the emerging markets going into these index funds. So, when China goes down, they all get badly burnt and of course, Russia being eliminated from the index somewhat means that they’ve lost 7-8 per cent of their portfolio overnight. So, all of these factors make people very wary of China, but that does not mean that there are no opportunities.

Q- What do you think large global investors are thinking at this point in time? You’ve run billions of dollars as a global investor, you know would they be thinking that this is not the time to be adventurous and up allocation to emerging market equities? Maybe it’s better to be in the safety of home in the US dollar assets, where bond deals are inching higher. Would there be a propensity to take money back into the home ship at this point in time?

Yes, that’s already happened. If you know one of the reasons why these interest rates have been attracting people back to the US market is because, with US dollar deposits, they can get a lot more and equal to what they’ve been getting anywhere else. But, the other important factor is that people in other countries that were holding local currency, debt, or local currency assets want to get rid of those assets and move into US dollars. So, that’s the reason why you see this incredible strength of the US dollar. 

The other factor that you must look at is that a lot of people have been burnt in the market and therefore don’t want to talk about investing more in the market. We haven’t really reached the end, however, I think there’s still considerable optimism in the market and I think it probably would take another leg down to really make people very despondent. 

So, they’re in the process of selling despondently. In other words, giving up completely on the market, we haven’t seen that yet but this could come. So, it’s a very interesting phenomenon that we have nowhere. As I mentioned, at least in America people feel quite wealthy, they’re traveling and so forth. Even in London, if you look at the hotel rates and prices in general, they have not come down, they’ve gone up. So, there is still a considerable flow of money. So, we haven’t reached that point where people are giving up completely and saying look, that’s it but there’s definitely a move or has been a move into US dollars.

Q- You’ve just said that sentiment indicators according to you are not indicating a bottom that you have not seen the kind of pessimism yet, which is consistent with markets having bottomed out. 

We’re now in bear markets in most markets around the world. But, I don’t think, we’ve seen the end there, in other words, true bear markets, when people have really given up and I just dumping everything into the market and saying look never again – I don’t want anything to do with stocks and so forth we haven’t reached that yet.

Q- Are you talking about the S&P out here? Are you talking about the Nasdaq? Because the Nasdaq was the first to lead the fall and there the stock price collapse has been quite brutal. Has the Nasdaq made a bottom? Do you expect tech stocks to lead the slide, like last year?
 

No, I think techs already had it. They’ve already had a big downturn. You must remember that Nasdaq has outperformed the S&P for a number of years. So, even those that have seen this downturn are probably above what they would have been if they were just in the S&P 500. Let’s say, but, I would say Nasdaq has already had it.  

We have already seen that decline and, the next leg will be with the S&P. By the way don’t forget Bitcoin and the cryptocurrencies. Bitcoin would have to go down quite a lot if pessimism continues and increase and that could be a very good leading indicator. 

Let’s put it away for what’s happening in the stock market, so we watched the Bitcoin prices, very carefully because we just don’t know where they’re going to go. We’re now roughly at about 19-20,000, but it could go down to 10,000 and that would be really a very pessimistic scenario for many people.

Q- How would gold do in a scenario like this? The one that you’re painting, Bitcoin down to 10,000. Another, leg down for the S&P 500. How do you see gold fairing?

I think gold will do fairly well and that’d be fairly steady. I’m not saying go through the roof, but I’m saying that gold will probably hold its own and perform better in such an environment.

Q- Now, you know sitting in India, a lot of people are actually very enthused by the relative outperformance. Some see it as a risk that India has not fallen anywhere close to how much even the S&P 500 has fallen this year. But, some take comfort from the fact that India is actually standing out and being so resilient as a market. How do you see this cookie crumbling? Do you see the relative outperformance continuing or valuations actually acting against India in the next leg down, which you expect to come?

I think India will continue to outperform. Not that the market won’t go down, if there’s a global downturn then India will be affected. But, India definitely will outperform and part of the reason of course is the fundamentals of the Indian economy. The Reserve Bank (RBI) has done a fairly good job in managing the money supply and so forth. Most importantly, the government has moved to improve investment conditions. So, they’re attracting more and more high-tech manufacturing. That is now in China and elsewhere in India and this so-called Gati-Shakti programme to speed up approvals and speed up the government bureaucracy in India is going to be incredible. It’s going to have a big effect and a very positive effect on the Indian economy.

Q-Where would you be positioned, Mark, as an investor in India? I mean, if you were running emerging market money now and you said this is an outperforming market, I want to be here. What would you buy because traditionally large global investors like you have bought IT and banks, the two big sectors in India? But, IT has come under the clouds because of the global headwinds. What would be the right way to be positioned at this point?

Well, we still like Indian software. You know India is a leader, globally in the software market. I think they will continue to improve and there’ll be lots of opportunities in that area. The other is infrastructure-related stocks. Stocks that deal with pipes and tubes. Stocks in the supply of high-tech kinds of things for the construction industry. I think that would be a good area to be because a lot of the infrastructure projects in India will be accelerated as we’ve offered the new government policies. So, I would say those would be the two areas and possibly in healthcare. More and more Indians are taking advantage of better healthcare and they have the money to do so and that will be a growth area.

Q- When you say healthcare, do you mean hospital chains, diagnostic companies those names, or pharmaceutical companies?

Diagnostic in hospitals, most importantly, and a few selected pharmaceuticals.

Q- What is your base case assumption that this over the next 12 months? It still is a market where it’s difficult to make money for equity investors that this bear market actually extends through the next 12 months because the last 12 months have been flat for equity market investors. They have not made any money. Do you expect one more year of paying ahead?

I think perhaps a half year of pain is ahead, but you must remember even in this painful situation, there’s money to be made. As I mentioned, if you have companies that have good pricing power, strong balance sheets, and so forth. They’re going to take market share away from their competitors and they’re going to do very well. So, you know, if the index is going down, it doesn’t mean that all the stocks have to go down. 

But, generally speaking, yes there’s probably more pain generally in the index ahead and, one of the reasons for that of course is the Ukrainian situation. You must remember that the Ukraine situation could get worse before it gets better and that can have a global impact in many different directions. There are winners and losers there as well because although Russia is going to be selling less gas and oil to Europe, other countries will be selling more. So, that probably is one of the reasons why the US dollar is strong because the dollar has become an important currency to buy oil and gas from the US.