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    Ready to bet on bombed-out NBFC and infra stocks in India: Mark Mobius

    Mark Mobius-1200ETMarkets.com

    Story outline

    • India now at the cusp of a big breakthrough in terms of growth and prosperity.
    • ETFs behind concentration of money in big index stocks.
    • China and India have biggest allocations. Also look at Africa.
    If one thinks about liquidity, then one has to go to China, India, Turkey, South Africa, etc, to invest. But if you are willing to take a long-term view and go into private equity that would be places in Africa, says Mark Mobius, Founder, Mobius Capital Partners, at the ETMarkets Global Summit in Mumbai. Excerpts from an interview with Nikunj Dalmia of ETNOW.

    From Ray Dalio to Howard Marks to just about every global guru have been saying this is the longest economic expansion US markets have seen. Do you think somewhere we need to be cognisant of the fact that the world has not seen a sharpish equity correction after 2008?
    What we are faced with now and this has probably been taking place in the last 15 years is that there has been an acceleration of productivity as a result of the digital revolution, as a result of the internet and the incredible speed of information flow. This is one thing that the central bankers have overlooked. They are focussing on erroneous inflation numbers. The inflation numbers are really erroneous. I do not think they really reflect what is going on in the market and the fact is we are in a deflationary environment and have been for quite some time.

    If the central bankers are trying to achieve this magic 2 % inflation and pumping money into the system, you have an incredible flow of capital and by the way, no one really knows what the money supply is because you got all of these other currencies coming into play. So, you have an incredible flow of funds going into investments and that is driving increasing productivity gains as a result of this digital revolution. So we are in a new game and that is a reason why I believe you have had this stock market boom in the US and continued increase in the stock market gains.

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    To quote from Sir John Templeton, one should buy when there is fear on the Street, sell when there is greed on the Street. If I look at the US market, it is 15 stocks including FAANG stocks and Microsoft, that is about it. Why do you think there is so much of concentration in a select few stocks? It is true in India too. At a time when the cost of capital is low, shouldn’t there be a broad-based market rally?
    The reason for that I believe is the rise of ETFs. In America and I believe probably here in India, you are seeing the same phenomenon. ETFs are now overtaking actively managed funds. So what are ETFs? ETFs are index vehicles and the index is driven by the large stocks. So, you have a situation where as the money comes in the ETFs, more and more money goes into the indices and that pushes up the largest stocks in the index. I believe that is what has happened.

    By the way this presents an opportunity because since a lot of the money is chasing those big stocks, there are a lot of bargains to be had in the smaller stocks because do not forget many of these smaller companies are now taking advantage of the digital revolution. In fact, one of the things we look at when we are examining a company is what is their digital philosophy? What is their plan to take advantage of the digital revolution? So, I believe this presents a big opportunity.

    I distinctly remember 20 years ago when I started my career, it was difficult to get a seamless transition of information. You had to struggle on various websites and publications to get more knowledge about the company. Since the information flow is seamless and investors are more aware, do you think just because information is there, they have become better investors? Or would investors still get trapped into the play of fear and greed?
    The rise in information flow makes people more confused; it becomes more difficult because you are bombarded with all this information and many of it is not accurate. Which is why investors have to focus on some key elements and that is why I try to outline in my talk, things like the dividends rising or not. If they are not, then maybe you should reject that company. Also check if the return on capital is high or low. These are the key factors you got to look at, otherwise you will get very confused.

    "5% growth is very good growth for a country of India's size. Going forward it is going to be more and more difficult for India to achieve the 10% growth simply because the size of the base is getting bigger and bigger."

    — Mark Mobius



    Tell us about your current allocation without getting into size. Where have you been shopping?
    India is right up there with China. China and India are the biggest and I believe now India has surpassed China in the allocation. Then you have Brazil; we have a little bit in Russia and I wish we had more because Russia has done very well. We are in Turkey and we have little bit in Indonesia. Those are the main countries.

    What is your pitch and what are you buying in India? Are you still buying the good old private banks and consumer names which are crowded or are you ready to bet on some cyclicality and beta in your portfolio?
    We want to buy stocks that are really bombed out and of course the non-bank financial institutions were one focus that we looked at. The other area was infrastructure. In other words, companies that supply the goods and services are building infrastructure. Those are the two areas that we have looked at.

    What do you make of the current slowdown in India? Markets are nervous about what is happening to the Indian economy. As an outsider and as an investor what is your view?
    Well look at it! Hey! 5% is very good growth for a country of this size. Yes, it is down from where it was, but you must remember going forward it is going to be more and more difficult to achieve the 10% growth that you had previously simply because the size of the base is getting bigger and bigger. It is getting more difficult. It’s the same thing with China. You know 10% growth in 2010 for China was smaller in dollar terms than 6% growth today. The pie is much bigger so that is one thing.

    The other thing is that when you are introducing so many reforms and changes as Modi has been doing, there is always a period of shock where people say oh! wait a minute, this is a big change! Let me hold back, maybe we can wait or this is a new tax, I do not quite understand this! Then you to tend to have a little bit of a sold down but I believe by next year, you will see a big pick up again when people get used to the reforms that are being implemented.

    We have not had a clean year of earnings in India. First it was demonetisation, then GST, then we had the IL&FS crisis. This year the base effect and slowdown in autos has hit us. ,Could we be in for one or two years of clean earnings? Do you think the darkest dusk before the dawn is over?
    Well that is what I believe. As I just mentioned, a lot of these reforms that have been kicking in, have upset the applecart, so to speak. In other words, a lot of people are confused about how to react to this and by next year, I people will begin to become inured to these changes and will be able to move forward.

    India has always commanded a premium for its high governance standards. The PE multiple in India is much higher than any other emerging market. Given that last six, eight months has not been exactly great news for good quality promoters where corporate governance issues have been exposed, leverage concerns have come to fore, is there a challenge that Indian companies?
    If they continue to have good governance, there is no reason why their stock prices cannot continue to move up, provided that newer things come in and they are able to adapt to the new internet society.

    But you must remember because of the internet, because of smartphones, because of this incredible speed of communication, it is going to be more and more difficult to hide poor corporate governance and more and more companies will be exposed if they have bad corporate governance and that will affect their share price. On the other side, those that have really good governance and are more transparent, will do quite well. It is true globally, not just in India.

    Markets always follow a mean reversion. There is always a pattern which is at play, sometimes it is dividend investing, sometimes it is growth investing, sometimes it is PEG. Right now it is all about data and artificial intelligence. For the next four, five years which is the big trend both locally and globally, which could be at play?
    The big trend is the change in consumer behaviour. This is one thing that has probably been overlooked by many, many companies. They do not realise that the new consumer is very different from the old consumer simply because of their ability to assess the global picture and you are getting this in politics by the way. One of the reasons why you have the spontaneous demonstrations around the world -- be it Chile, be it Hong Kong, you have that in many countries around the world and that is because there is a whole generation of people who have been growing up with smartphones, which is a very powerful vehicle to learn about what is happening globally.

    This is happening with companies too. The behaviour is changing. The young generation, instead of going to the theatre, are watching on their phone or at home on Netflix. We have to watch the changing consumer behaviour very, very carefully.

    You have been investing in India for about 20 years plus now. What has always surprised you and where have you been impressed consistently and where have you got disappointed again and again?
    What surprised me, of course, is the tremendous strides in the growth of the markets, not only in terms of size but in terms of digitalisation. I remember, many of the people may remember the old Mumbai, the Bombay Stock Exchange was like a parking lot. It was open air and there was physical delivery. I remember people carrying their share certificates on their shoulders

    You have actually seen that?
    Yes, it was just amazing to me and then the National Stock Exchange came and you had the digitalisation and a tremendous change has taken place. So these are the changes that we have had and looking forward we are going to have more. There is going to be more of this…

    So what has disappointed you? What would you rather avoid while investing in India?
    By the way, this is true not only of India but any other part of the world. What disappoints most is corporate governance and the managements of companies. The managements will tell you one thing and then do another or they may be hiding something under the table. Thus has been a big disappointment, the lack of transparency.

    Can you give some example?
    I may not give you an example because we may get into trouble. You know what I mean.

    I do not know what you mean.
    Let us take an example from America. That is a safer place to talk about and Iran.

    We know about that. Tell us something new, tell us something different. Tell us the inside gossip of investing in India.
    I am trying to think of an emerging market or I will tell you another one in Brazil. Mesbla is a Brazilian department store. By the way this is another example, another warning, they do not just talk to the finance manager, talk to the chairman and the people who control the company and look at their background. But anyway, we invested in Mesbla which was a very successful department store in Rio de Janeiro at that time. We talked to the finance manager each year, things look good, earnings were going up, things were great. Then all of a sudden, the company is bankrupt, all the assets are gone.. We tried to find out what happened to it. It was almost impossible because the company had been robbed basically. So one day, a year and a half later, we went to the CBM, CBM is the SEC of Brazil. I said look we would like to talk to one of your directors about Mesbla, we want to find out what happened and he said no problem, we will get a director and this gentleman comes out, the former finance director of Mesbla is now with the CBM. This is the situation.

    Has that happened to you in India also?
    Yes, it has happened. As you all know, I mean these things…

    Nobody knows Mark you are the most experienced person in this room. We want to learn from you experience.
    Let me leave town first then I can tell you. That is the reason why I tell people look at the backgrounds of the people. Try to find out what is their motivation, what is their background, what are their extracurricular activities, who are they friends with, etc, etc.

    How has life changed for you when you were managing money for Templeton versus when you are managing for your own firm now? How do you manage it differently?
    The difference is that I have more of my own money in these funds than the Templeton funds because I had money in the Templeton funds but Templeton was so big. The difference is that we are more focussed now. We focus on just a small segment of the universe whereas with Templeton, we were all over the world.

    You said value investing is not dead. Do you think we need to understand what value stands for? Measuring value cannot be PE multiple and price to book. A classic example here how do you define value? Just because something is cheap, does not mean it is attractive.
    That is why I mentioned that one should look at the management of the company, the ownership of the company and find value in the people that are running the company. In other words, are these people capable of high quality, high moral standard and this is part of the value equation. In other words, just looking at the numbers is not enough. You got to go behind the scenes and look at that.

    The second thing as I mentioned was try to focus on what is more easily verifiable. Cash dividends are verifiable. Earnings are not so easily verifiable. The big challenge we have is that accounts of the companies are audited by auditors and these auditors are hired by the management and by the boards of directors. So you know what side they are going to be on. I am not saying that they are dishonest in any way but they would tend to make the statements look a little bit different than they otherwise would be. You got to dig behind.

    So that is the reason why very often when we look at the company, I tell the analysts the first thing they want to do is talk to the management but also to talk to their competitors, talk to the market because you will get another view of what is happening in the company.

    In the 1980s, if you had invested in Japan you had hit a home run. If you invested in US blue chips in 1990s, it was like a golden decade. The last decade exclusively belong to emerging markets and India. Which is that trade for the next five, ten years? Every 10-12 years, the trend, the cycle, the geography and the magnification changes.
    Obviously emerging markets because if you look at India and China, particularly India, I believe is now at the cusp of a big breakthrough in terms of growth and prosperity. So you have to look at these countries that have the potential to grow a lot faster in terms of the economic size of the economy. I believe India is right up there. China, of course, has already had very good growth. They are going through a difficult patch but they will still be good. But there are a number of smaller companies.

    The problem in discussing this is that if you are an equity investor in an open-ended fund, you cannot buy illiquid stocks, that is for private equity. If you look at the universe of opportunities around the world, where would you want to be if you had the ability to invest long term without needing the liquidity? It would be Africa because Africa has got some of the fastest growing economies in the world and Africa is now in a situation where they are able to leapfrog and go into the latest technology. This is a tremendous boost to productivity so that is why it is very difficult when you ask what is the best place to invest. I have to think about the liquidity which means China, India, Turkey, South Africa, etc, but then if you are willing to take a long-term view and go into private equity that would be places in Africa.



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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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