How much return can Indian markets generate on a 3-year CAGR basis? Mark Mobius answers

“Till now, it has been software exports from India. Now we are going to see hardware exports from India and this is going to be very positive for the entire economy. Of course, then you have got this vast consumer market which is becoming richer and richer so that is going to be a big plus as well,” says Mark Mobius of Mobius Capital Partners.

How do you value markets when interest rates are moving higher? The way markets have historically valued the market, is a function of interest rates and cash flow. If interest rates are rising, how will that change the value orientation for growth stocks?
There are various types of growth stocks; there are growth stocks that are in debt, that have tremendous sales growth but are leveraged to the hilt. Then there are growth stocks that have no debt which have a high return on capital and have no problem with cash. Those are the ones that we want to be in when interest rates are rising.

One thing you must remember is that the correlation between stock market performance and interest rates is very low. There are times when interest rates are high and the stock market is doing very well and there are times when interest rates are high and the stock markets are not doing well. So one to be very careful in assuming that just because interest rates are going up the stock market will be in trouble.

One of the reasons why this is like a correlation is that very often the stock market will anticipate what the interest rates are going to be. So anticipating a high interest rate, stock markets at the beginning go down but then it is realised by the market that high interest rates are not going to have a big impact on good companies.

Many of these companies that have low debt would begin to take over their competitors and of course their competitors with high debt will fall by the wayside. So, we are going to make good money on those companies with low leverage.

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In that sense we are not worried really about the high interest rates. What we are worried about is making sure that we have companies that do not have debt, that are not leveraged and we see great opportunities now as a result of that.

You have not bought into consumer tech, you have not bought into manufacturing names in India, you have not bought into any EV companies or auto companies. Do you only look at companies which have more leverage and are cash flow dominated?
We are interested in manufacturing; there is no question about it. APL Apollo is one example, but we want companies that have this high return on capital and no leverage. And by the way, very often we have a high ROA and high ROE the debt will be low simply because they are generating so much cash they do not need to be leveraged in any direction and because you want earnings growth at the end of the day that is pretty well what it is all about.

But the reason why we are not in a lot of these companies in India is because we have not been able to find companies that meet the criteria. There are very few companies in the world that have a ROE and ROA of over 20%, it is not easy to find but those are the kinds of companies we want but we are not biased against consumer, manufacturing or any of these sectors. We are quite interested and would love to have more of these names because the portfolio will be more diversified but we just cannot buy them.

The markets in the last one year have given absolutely no returns. I am talking about the index and in dollar terms the returns actually have been negative so if the starting point is October 31, 2022, how much return can Indian markets generate from here on a three year CAGR basis?
In dollar terms, you could probably get annualised returns of 5-6% for the entire market but of course for good companies, the returns would be much higher than that. It would be in the mid teens in dollar terms. So that is the kind of thing we are looking at going forward.

But will that make Indian markets not that attractive if the risk free return in the world currently is 4% plus? Also as interest rates are rising, emerging market currencies like India will remain under pressure. If you expect Indian markets to generate 5-6% return in dollar terms, then investing into India from a global investor perspective may not be a great idea?
Well do not forget the 4-5-6% that I mentioned includes the devaluation prospects of the rupee. A lot of the devaluation against the dollar has already happened. It is probably not going to go down much further, particularly with the plans to raise interest rates as you know the RBI is thinking of raising rates in India. So I am taking that into consideration.

The devaluation of the currency does not necessarily mean that we are going to have a bad return in dollar terms because you have got companies that are exporting and getting dollars and their returns in dollars are very good as a result of that.

What is that one trade which you would say is not a multiyear investment but a short to a medium term trade?
I would probably have to say India and not the US. The US has already done quite well but is coming down; Bitcoin will follow the US market or will lead the US market but if you have to be very specific and pinpoint one area, it is probably going to be India. And the reason why I say that is it is a huge market, of course, but what is happening in China is having a very big impact on India; more and more manufacturers are moving to India. Till now, it has been software exports from India. Now we are going to see hardware exports from India and this is going to be very positive for the entire economy. Of course, then you have got this vast consumer market which is becoming richer and richer so that is going to be a big plus as well.

If you are bullish on India why are you shying away from financials because financials is a biggest proxy to any country. Why are you giving the largest sector in India a skip?
The reason is first of all, most of the big banks are in the index. Second, generally and typically, when you go beyond the big banks, the scope and the transparency is very bad. This is not only about India but throughout the world. If you ask a bank, please give me your client list, give me a list of your outstanding loans etc. they would not give it to you. So, it is very difficult to know what the bad loans ratios look like, which is very critical when you are looking at banks. That is the reason we shied away.

It is not a hard and fast rule. When we find a bank that is not in the index but is very transparent and doing well, by all means, we will want to buy it.

In your previous avatar you bought into PSU stocks and that was not a very happy investing experience for you. But looking at the renewed vigour, would you be tempted to look at Indian PSU stocks?
Probably not because of the management difficulties in those companies. We prefer companies that have a strong entrepreneurial bent, companies that are privately run and where entrepreneurship is really the key. When you get down to the growth in business, all the companies that have been growing very rapidly are usually very entrepreneurial and this is something that you do not get in that category.

Warren Buffett made 99% of his wealth after he turned 60. Is Mark Mobius thinking on those lines?
Yes, definitely I want to continue. I love what I do, I love the work, I love to talk to people like you, find it very interesting and I think that is what keeps me going.

In the movie Gordon Gekko says his very famous line that “every man is chasing a number.” What is the number Mark Mobius is chasing – a billion, two billion, 5 billion?
Since I have left Franklin Templeton, where we started from the bottom which was a big challenge and lots of funds. Now we are looking at about two billion. We got a long way to go.