What do you think of the nature of the risks for emerging markets like India? You invested in emerging markets when India was just a small frontier market. How is India currently stacking up against emerging markets to weather this risky environment?
Mark Mobius: India is currently in a very good position as the Indian macroeconomic environment is quite favorable for the long-term outlook. I would say that India is in the take-off phase as incomes are increasing, economic growth is very good and technology is having a very big impact on the Indian economy and the Indian population in general. I would say India is in a very nice place.
What could be the duration of the overall risk? Some say that the hands of the world’s central banks are tied because the nature of risk is such that beyond a certain point raising rates will not be able to control inflation unless it takes a sledgehammer approach and to completely block growth. How do you see that being balanced?
Central banks around the world, starting with the Fed, tend to take an authoritarian approach because they have a model that tells them to control inflation. They need to raise interest rates above the measure of inflation they use. Of course, there is a big question mark against this measure of inflation as I pointed out in my book The Inflation Myth. But anyway, let’s say the inflation rate is corrected in America and it’s 8.5% higher, which means the real rate must be positive and the Fed will have to raise rates above 8.5%, or 9, 9.5% or whatever it is up to inflation. rates go down.
So I would say that we’re looking at higher and higher rates and I’m frankly surprised that people are shocked at the three-quarters of a percent hike that the Fed just instituted. That doesn’t surprise me at all. They are heading towards 9%. We have to prepare for this. However, now the most important point is that high interest rates do not kill the markets. Stock markets can rise in the face of high interest rates. There will be some impact temporarily, but in the long term, bull markets are often accompanied by high interest rates and rising interest rates, I might add.
While global growth estimates have been lowered by most agencies, global profitability estimates have still not been reduced by the same amount, meaning there is scope for lower estimates. business profits. If this does not happen in time, even after the sharp drop, global markets will continue to look expensive. Is this a justified assumption?
Not really and the reason you need to consider this carefully is the differentiation between different types of businesses. We are going to see winners and losers in any type of situation. The winners will be companies that have a high return on capital, have little or no debt, and have earnings growth. They achieve profit growth through pricing power. In such an environment, highly indebted companies will go bankrupt and their market will be taken over by the leaders. These leaders will then have pricing power and can raise prices in line or even above inflation.
This is therefore one of the explanations why the markets rise even in the face of high interest rates, because the index is made up of large companies and their pricing power is increasing in these times.
The Russian-Ukrainian conflict has lasted much longer than previously thought. It may have reached the margins of the country, but it still persists. There is a cold war situation between the United States and Europe on one side and China and Russia on the other. Where do you see all this heading?
There is no doubt that there is a great risk of nuclear war. This is a risk that has always been with us, because so many countries now have nuclear weapons and mistakes can be made. This is something that we have to look at very carefully. I recently did a little study on the Korean War, Vietnam War, and World War II. During all these wars, the S&P500 was going up, not down.
A war does not necessarily mean that the markets will go down. Markets could actually go up in that kind of situation and the reason for that of course is that governments start spending on defense and other things and businesses grow in response to that spending. So there is a bull market. It’s an interesting phenomenon. A war does not necessarily mean a bear market, it actually means a bull market.
The Nasdaq is down about 33% from the peak; it’s almost bear market territory for S&P and Dow Jones is also down 20%+ after a 10-year long one-sided bull run. Do you think enough of a correction has happened there or do you see the possibility of further valuation compression in the US?
We probably have more to do. The Nasdaq for example, is down more than 30% and of course you have to be careful with cryptocurrencies. Many of us don’t realize how many people in the world are researching and investing. I use the word invested very carefully in cryptocurrencies. When cryptocurrencies go down, many people feel poor and Bitcoin as the main cryptocurrency goes down dramatically. It is lower than the S&P or any other index and it is a kind of leading indicator.
Since I think the other indices – S&P, Nasdaq – might go down more, but then we’ll have a soft effect and the next bull market will begin. So this is a great opportunity to buy bargains, but you have to be careful and make sure you have companies with high return on capital, pricing power and potential for profit growth and debt free. .
How do you see the future of this crypto asset class after such a big deflation?
No one can predict the markets and I am not the first to try to predict a market, but I would say that cryptos need to go down further. Crypto is a kind of religion, it is a faith. When people start to lose faith then there’s nothing left, there’s no dividends, there’s no interest paid, there’s no assets except something on the internet ,
So when people lose faith it can go much lower and drop to zero at the end of the day. We have to watch the space very carefully because there are millions if not billions of people who have bought cryptocurrencies and this is the only thing they have bought. They haven’t bought anything else, they haven’t bought stocks, they haven’t bought bonds, they believe this is the next big thing and they’re going to be very unhappy.
Now that the current Indian leadership is completing their eight years in office and making plans for 25 years, how do you see the role of a stable government and the kind of stability that the country is experiencing, because India’s role also in the world order is undergoing a very slow and silent change?
This is very important and India is probably a very good example. Current leaders are forward-looking and demonstrate credibility. They have adopted and spread the technology to all corners of the country. It’s an incredible development and it’s pretty mind-blowing. They did an amazing job.
This is one of the engines of growth in India, in my opinion. Leadership is very critical and the rule of law is very important. I hate to use the words of George Soros, but an open society is very critical I believe because an open society results in creativity and innovation and that is what really drives the growth of India and other countries of the world.
