In 1987, Mark Mobius told his would-be employers Franklin Templeton that he will head their emerging markets equity fund provided they open their first office in an emerging market country. The group assented to this request and an office in Hong Kong was quickly opened followed by offices in India and other countries in the 1990s. Today, those investments and focus on emerging markets have paid off handsomely for Templeton.
In an exclusive interview to ET, Mobius displays an upbeat mood regarding the prospects of the eurozone, India and the US economy. He indicates that India could have hit the bottom of the downward cycle and predicts that Greece will remain in the eurozone. He feels low productivity - bought on by excessive government regulation and high taxation, is the real culprit in India’s inflation picture. Excerpts:
Q: India’s GDP growth has dropped to 5.3% in the fourth quarter. How worrying is this for investors?
It is all about perception and relative growth - many developed economies would be more than happy to have India’s growth rate. Nevertheless, the slowdown in India is a concern, given that this time around, a lot of the reasons are domestic in nature. However, we have probably seen the worst of this downward cycle and things could improve from here.
We have seen increased commitment from the government about changing the perception about policy paralysis in recent times. The Indian government needs to reduce its role in the economy by privatising all of the state-owned enterprises and by reducing the long list of regulations which hamper growth in the private sector.
Q: What about RBI’s move to keep rates steady?
The Reserve Bank’s efforts to contain inflation are commendable and keeping rates steady are a part of that effort. Unfortunately, the real culprit in the inflation picture is not interest rates but low productivity bought on by excessive government regulation, high taxation and restraints imposed on the private sector. A freeing up of the economy would lead to higher productivity and will drive inflation down.
Q: Global factors are also hurting growth prospects of emerging markets.
In an increasingly inter-linked world, notwithstanding the relatively strong fundamentals, emerging markets will get impacted by changes in risk appetite. However, the role of EMs has changed a lot in the last few years, especially since the global financial crisis. Be it the IMF, World Bank or G20, there is increased acceptance that EMs need to be accorded higher representation. This is also reflected in the market capitalisation - EMs now represent about a third of the world’s stock market capitalisations.
There has been a growing realisation that large emerging economies such as China and India have been increasing their contribution to global GDP. Given good growth projections in many emerging countries, along with their youthful populations and generally better debt-to-GDP ratios than many developed markets, I firmly believe that global investor exposure to EM should continue to increase.
Q: But will there be opportunities in EMs when the whole developed world is undergoing an economic turmoil?
The worries and uncertainty in the US, Europe and Japan will likely continue to create some angst in the global market, which could spill over into emerging markets, but as noted earlier, I view uncertainty as opportunity. We may even see some emerging market brands shopping for assets in developed markets at bargain prices and growing their global presence.
It is also important to note that while exports from the emerging countries are increasing, the percentage of those exports going to the developed countries, Europe and the US is declining so the dependence on exports to the developed world is decreasing.
Q: You believe in the resurrection of Europe. What makes you think Europe will emerge stronger from the crisis?
The mere fact that the European nations are talking about fiscal discipline and are negotiating towards a fiscal union is excellent news. We know this will not take months -- but years. Patience has its own rewards in this case. As value investors, we always look at volatile periods and indiscriminate selling as a buying opportunity. Europe is experiencing economic turmoil and we are looking there for potential investment bargains brought on by the crisis.
The recent EU summit has indicated that European leaders are trying their best to put together tangible measures that can address the fundamental problems facing the European Union. This will take time and require patience, but in the end, I believe it will yield some positive results. The problems that led to the debt crisis must be addressed-and they are now getting addressed. Both eastern and western European countries have great potential to cooperate and achieve a better economic outcome for all.
The West can invest in the East and the East can supply the West with lower-cost goods and opportunities for investment, as well as expanded markets. From my perspective, the euro has been holding up relatively well throughout the crisis; so far, it hasn’t plunged dramatically and has held above its debut price back in 1999. That means someone has confidence in the eurozone’s potential, and I do, too!
Q: What if Greece breaks out of eurozone?
I believe Europe should emerge stronger, regardless of whether or not Greece chooses to leave the euro (which I think is unlikely). Our belief is that the recent election results have reduced the risk of Greece breaking out to some extent. Over the medium-to-long term, Greece can reform its economy by curbing wasteful government expenditure and eliminating barriers to business growth. Even if an exit happens, Greece is likely to continue being part of the single-currency system.
Q: How’s the situation in Spain and Ireland?
Spain and Ireland along with a few of the other peripheral European economies will continue to have problems managing debt. Most of the policymakers face a difficult balancing act between austerity and growth. The necessary austerity will undoubtedly be painful for some European countries, but it would force the weaker players in the region to get their acts together.
Q: After many months of positive numbers, the US is showing signs of fatigue.
We are not overtly perturbed about the recent data trends - over the last year or so, we have seen a broadening of the US economic recovery on several levels. Progress includes signs of a housing bottom, a modest rise in consumer spending, non-manufacturing sector expansion and most significantly, continued earnings growth and compelling valuations of many US companies. It is important to note that the US leading indicators and, in fact, the OECD leading indicators are not down but up.
Q: How are you approaching India as a money manager?
We remain positive about the long-term prospects of the Indian economy and its companies and are looking to take advantage of the recent volatility. 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.
(Courtesy Economic Times)