The long-term growth trend In India remains intact and the country stands to reap dividends from the shift in investors' perception towards China, according to Mark Mobius.
Many global investors, particularly those from the U.S., have experienced setbacks and are now exercising caution in further investments in China, the co-founder of Mobius Capital Partners told NDTV Profit.
Consequently, they are looking towards India as the next promising destination. India stands out as the only other country with a population exceeding a billion and a young demographic profile, he said.
The price to earnings ratio is often used when evaluating valuations. But, a challenge arises in China as earnings growth is not as significant as in India, where the PE ratio may appear expensive due to the swifter increase in price as compared with earnings, according to Mobius.
"But if you consider the growth rate of earnings, India could be considered cheaper," he said. "So, that's the reason why we usually don't look at price-earnings to value a company or market, we look at return on capital and, of course, we look at EPS growth."
The key focus is on determining the return a particular stock or market provides for the invested capital and, in this aspect, India is performing well, Mobius said.
India is perceived to have benefited from the current situation in China. However, this does not imply that China will remain subdued indefinitely, he said. Recovery will take time and in the interim, India stands to gain from the redirection of investment flows from China, according to Mobius.
His portfolio currently has 25% exposure to India, and he expects this allocation to increase in the future.
Mobius said India would probably receive the largest single country allocation due to several factors—the presence of strong values, evident growth opportunities and the substantial size of the Indian market, which is large and expanding.
He identified two reasons for the changing real economy of India. Firstly, technology and digitisation are being actively promoted by the government, which is considered crucial for growth, not only of India but also for other countries globally.
Secondly, the presence of a young population is emphasised, highlighting their ability to quickly adopt and adjust to the new technology, according to him.
Where To Invest
Mobius emphasised that the critical factor—whether in transportation, infrastructure or banking—is undeniably technology. The key consideration lies in evaluating the extent to which companies leverage technology to enhance profitability and growth prospects.
"We love technology, but it doesn't mean we're going to buy only software companies or hardware companies in the tech sector, but we will buy companies that use this technology to improve growth prospects and profitability," he said.
Mobius said the suppliers to electric vehicle companies—including those providing batteries, battery components and electronics—represent crucial elements in the EV industry. "The electronics in electric vehicles would be an interesting area," he said.
Watch The Full Interview Here:
Edited Excerpts From The Interview:
Mark, you travelled extensively in India a few months ago, visiting six cities across various states. Did you feel the real economy on ground is as exciting as the equity markets seem to show it to be?
Mark Mobius: There's no question. There's an incredible amount of growth and dynamism in India and all the places that we visited.
I felt this incredible energy and what's so important in India, in my mind, is the different cultures. You got these different states with quite different cultures, but something holds everything together. So there is a sense of being Indian, but yet also being from a different part of the country and having a different language, which gives India tremendous strength in my view. So I was very excited and very pleased by what we found in India.
Mark, you've tracked India for decades, and have always been a fan of India in some sense. Do you feel like the tide is finally turning in our favour? Do you feel like, on the ground, the real economy is truly changing?
Mark Mobius: There's no question about that. It's very, very clear that things are changing dramatically, and very fast and I think there are two reasons for this. One, technology. Thanks to the government, they are pushing technology and digitisation. I think that is very, very critical to the growth of not only India but other countries around the world. But India is grasping that very forcefully. That's number one.
Number two, you have got a young population and these youngsters can adapt and adjust to this new technology more quickly than older people like me. So I'm learning from my young staff now about technology, and it's a wonderful thing to see.
So India has got those two very dynamic things happening and of course, added to that is the incredible cultural background that you have in India—tremendous creativity, just like we're witnessing the beautiful picture behind you—that illustrates how young people can create something so great, so colourful, and so creative.
In the last decade, India's always been an exotic location of sorts, for a lot of foreign investors. It was all about a little bit of exposure. In India, just because it's a large country, that was the story. Now of course, we've become rather significant for the world. India's inclusion in the JP Morgan Bond index was a step in the right direction and Bloomberg inclusion could be on the charts as well.
Do you feel like when you're tracking emerging markets, you will continue to see the euphoria around India and going ahead, that's only going to get larger and bigger?
Mark Mobius: Yes, I think so. You are going to see the euphoria continuing, but you must remember that when we look at stock markets around the world, whether it be India, U.S., China, wherever, there will be ups and downs.
So you got to remember that there will be times when the Indian market comes down by 10-15%. But that won’t be significant. The significant thing is that the long-term trend is in place and what I think has really changed is not only the fact that India is growing at 7%, but the fact that China now has become a place where many—particularly U.S, investors and global investors generally—have burnt their fingers, and are very careful about putting more money into China. And of course, where do they look? What's the next place? It's got to be India, because it's the only other country in the world with over a billion people and young people at that.
So I think, India has benefited from that situation in China. Now, that doesn't mean that China is going to be down forever. There will be some recovery, but it will take time. In the meantime, India will benefit from the shift of investment money from China to India.
Mark, you are an ace investor and you have invested in emerging markets for a very significant period of time. In your emerging market portfolio, how much percentage of exposure do you hold in India?
Mark Mobius: Right now, we have 25% in India. And that will probably be growing. And of course, in my new fund, we will look very carefully at India, and probably have more than that.
So, what happens to incremental funds in that sense? Will you continue to still add to India or would you then balance it out and add to other countries across the emerging market pack?
Mark Mobius: Well, of course, we've got to be diversified. There's no question about that. We can't put everything in one country, but India will probably be the largest single country allocation for a number of reasons. One, of course, the value is there, the growth is there. Also the size is there. The Indian market is big, and it's growing.
India has historically been touted as an expensive market and not very much has changed. The only thing that's working against us may be is that China has become really cheap now.
Do you still feel like the risk-reward and the growth prospects favour India, even at this stage? So while the structural story is in tact, and it still remains a buy-on-dips market, at these current valuations at these current prices, is India still as lucrative and attractive as you would have imagined?
Mark Mobius: You know, when people look at valuations, more often they will look at price-earnings ratios. The problem with that metric is that you're in a situation in China where the earnings growth is not as great as what you see in India.
So the PE ratio in India, because the prices moved up faster than the earnings, looks expensive. But if you consider the growth rate of earnings, India could be considered cheaper. So, that's the reason why we usually don't look at price-earnings to value a company or market. We look at return on capital and of course, we look at EPS (earnings per share) growth, but the key of course is how much is a particular stock or market returning in terms of the money invested, the capital invested. And in that case, India is doing very well.
In a recent interview, you said you liked the broader markets, because India does have a larger potential to deliver and the next leg of growth is going to come in from the mid-cap stocks or mid-cap companies. Have you spotted the next HDFC Bank or the next Infosys or even the next Reliance Industries?
Mark Mobius: Of course, we are always looking for those companies. And as a rule, we try to avoid companies that are in the index, which means that they're big, they're well researched. We'd like to look at companies that are in the middle and small category, which are not in the index, but which have good growth potential. Not all of them are good targets, but many of them have a tremendous growth potential and have a high return on capital.
So what we do is, we look at those companies and see which ones are going to be the next companies in the index because eventually they will graduate to be part of the index and then be heavily researched.
The advantage of looking at the small-and-medium category is that there's not much research. So we can do our own research and we know that we're learning something that perhaps other people have not.
Government-facing sectors such as railways, defence, infrastructure have been the big theme all through 2023. Some of them have done upwards of 200-300% returns. We have elections around the corner, but a lot of that is already discounted. Do you feel like this is a good space or a good proxy to play India and if yes, do you own anything in the railway, defence space or infrastructure stocks?
Mark Mobius: Some of these infrastructure stocks—the railways, airlines, roads, toll roads—are quite interesting.
But many of them have a relatively low return on capital. So you have to be careful. And then, also, you have a problem with government regulations, which could limit the profitability of some of these enterprises. And of course, most of those companies are large, they're not in the middle income or the middle profit sector, but in the large size. So we try to not look at such companies. But certainly it's not beyond the realm of possibility that we will look at some of these companies.
I think the key, whether it be transportation, infrastructure, banking,of course is technology. To what degree these companies are utilising technology to improve their profitability and improve the growth prospects? So that's what we look at. And there are some of them that are doing very well and are doing some very interesting things. So we love technology, but it doesn't mean we're going to buy only software companies or hardware companies in the tech sector, but we will buy companies that use this technology to improve growth prospects and profitability.
Would it be possible to give me examples of those companies?
Mark Mobius: I can't give you any examples now, because we are in the process of buying.
Anything that has already been bought?
Mark Mobius: So I prefer not to give specific names.
Talking about technology, AI, and I know that's a theme you're enjoying and just learning about. The big conversation these days is EV—unchartered territories. We are only scratching the surface in India. Is this a theme you like and if you do, how would you play EVs in India? Would you buy OEMs? Would you buy auto ancillary? I mean, is this even a space you're attracted to in that sense?
Mark Mobius: Right now, we're not too excited about EV for the simple reason that it is a very crowded market.
Recently, I was in China, and we were driving from one city to another. We were using different electric vehicles and they were all very, very good. They were excellent and the costs were low.
So, I think the same thing is going to happen in India, where the competition will be very keen and prices will be competitive. Profitability will not be that good. Of course, you could have a Tesla in the horizon, but I think that is pretty much. The opportunities are over. And now, the other side of the EV would be the suppliers to EV companies. Whether it be the batteries, the battery components, or other aspects of the electric vehicle. The electronics in electric vehicles would be an interesting area. So that's what we will look at. We will look at the suppliers to electric vehicle makers.
So batteries, tyres, anything to do with or going into the manufacturing of the EV car?
Mark Mobius: No, just the suppliers. For example, software, self-driving would be kind of fine.
Also, keeping the focus with tech, do you like fintech in India?
Mark Mobius: Yes, I like fintech. But you must remember that the central banks around the world, including the Reserve Bank of India, are looking more and more at fintech and are devising their own solutions.
Here in Brazil, for example, the central bank has created a payment system—an online payment system—that's very efficient, and would be very difficult for the private sector to compete with. In India, as you know, the central bank has this system for payments, which obviates the need for some private sector initiatives in that area. So I think you have to be careful not to get too excited about fintech. Not that it's not an important and critical growth area, but still, you've got to be careful about the investment in such areas.
Do you own fintech stocks in India?
Mark Mobius: No, we do not.
Just like auto, do you think for the infra pack, the better way to play this space is through the ancillary or the supply side? For example, cement, paints and pipes. Is that a better way to play the infrastructure story in India, or would you go with smaller infra companies?
Mark Mobius: I would say so. Normally, we stay away from infrastructure construction companies, because you get involved with a lot of problems. Corruption in the construction industry globally is a big, big issue and of course, that's true in India as well, as anywhere else in the world.
So you don't want to get into that sector, but some of the people who supply the materials, for example, pipes and steel that sort of thing, if you have an efficient producer, then there would be good opportunities in that area.
There is a bit of a divide in the consumption cycle in India. We have a massive rural population. However, for a lot of these companies, rural consumption is still not picking up. Interestingly, what's picking up is aspirational consumption.
How do you look at that space? Do you feel like rural consumption is probably the best place to be in, because in order to get to aspirational, rural has to go up the food chain in that sense, or would you stay invested and buy companies that play the aspirational segment in the country?
Mark Mobius: I would say that rural consumption actually is going up, but it's not being consumed in the rural areas. It's being consumed in the cities, because you are having a massive move away from the rural areas into the cities.
So it may seem that the rural areas are not consuming but in fact, those rural area inhabitants are moving into the cities and consuming. And of course, a lot of this consumption is aspirational.
If you go to any part of India, you will see people not only buying the essentials, but buying all kinds of other things that are not essential, but are aspirational.
If you have to bet on the space, would you pick staples, or would you pick urban consumption focused names?
Mark Mobius: I would look at the urban branded area. At the end of the day, it's a very interesting phenomenon. People in rural areas, when they consume, they want to buy a brand because even though the price point is very low, and the unit volume is low, they will want to buy a brand. They don't want to waste their money on something that doesn't work.
For example, if you buy soap powder, it will be a little packet rather than a big container. So I would look at branded products and if you look at India, the most successful companies are those with very credible brands.
Do you feel that private investments are still attractive in India or do you think secondary markets are so compelling at this stage in India that you'd rather go into a space through the secondary market as opposed to going into private investments? Where do you feel like all this money is flowing in?
Mark Mobius: Private sector. Investment is going to be growing at a very rapid pace in India. It's already big, but it's going to be growing faster and the reason for that is that there are so many family-owned companies that don't want to go public, at least at this stage. But they need capital, they want capital, and that's where the private sector will come in.
Private equity will come in and invest in these companies and help them grow. Then, at the next stage, they will get listed. And of course, as you can see, it's already happening in India. The number of IPOs in India this last year was more than I think five times that of the previous year. So, 2022 versus 2023 has been quite a dramatic increase in IPOs and I think you're going to see that continuing going forward manifold.
Nevertheless, there are lot of family companies that have not gone public and don't want to go public at this stage.
Have you subscribed to any of those IPOs in India?
Mark Mobius: No, we normally don't like IPOs because usually they're priced to perfection. We prefer to see the track record first.
Mark, you have talked about all the good things in this country. Are there any risks? Are there any obvious risks that you're concerned about at this stage?
Mark Mobius: Of course, there are always possible risks. One is the overheating of the market. I mean, there's been so much optimism about the market and there's a possibility there will be a correction along the way. So that's a possible risk.
The other possible risk is a change in government policies. Now, the current government is doing a terrific job and I know PM Modi has recently announced a big infrastructure programme, which is terrific and badly needed. So far, things are going very well but if there's any pull back from that, it would not be good news.
Also, with your India portfolio, what is the fear of holding that you have in some of these stocks? How do you call for exits? Is it when there is a requirement of cash from a client? Is it when you see a stock-specific company topping out, or when there's a trend reversal? When you buy a stock, what is the time horizon and what are the triggers that you watch out for before you take profits off the table?
Mark Mobius: What we do is, we look at a stock we like and we make the plan to hold it forever. There is no reason to sell a stock. If they continue to do good, they have good profitability and good growth. So we always say, well, about five years would be the timeframe. But in fact, we don't plan on five years, we plan on forever if the company continues to do well.
Nevertheless, as you mentioned, if you're running an open-ended fund, some clients want their money back and you have to give it to them and that means you have to sell some stocks. So we are forced, sometimes, to sell.
RECOMMENDED FOR YOU
India A Safe Bet Among Emerging Markets, Says CLSA's Alex Redman
Nov 18, 2024
Trump 2.0 Impact: CLSA Reverses On China To Go Overweight On India
Nov 15, 2024
Mark Mobius Endorses PM Modi For Nobel Peace Price
Nov 12, 2024
Donald Trump's Trade Tariffs To Benefit India As Manufacturing Will Shift From China: Mark Mobius
Nov 07, 2024
POPULAR