Political forces will begin to take over the role of central banks: Mark Mobius

Central banks have become too powerful. The influence of the people in power politically will begin to encroach upon central bank initiatives and prerogatives which I think is probably a very good thing, Mark Mobius, Founder, Mobius Capital Partners LLP, tells Tanvir Gill of ET Now at the India Economic Conclave.

Edited excerpts:

Same time last year, when I had asked if you have ever been bearish in your entire career, you had said: Never. Let me ask you this again. Given that 2018 has been an extremely volatile year for world markets, has that volatility been able to tame the bull in you? Have you turned a tad bit cautious getting into 2019?

The reason why I have always said I am bullish is because a very rational study of markets, especially emerging markets show that bull markets last longer than the bear markets. The bull markets go up more than the bear markets go down.

So, if you look at it very logically, you have to be optimistic because if you are in a bear market, you are buying very cheap stocks and the prices will not stay low very long. Take that opportunity and if you are staying in there in a systematic way doing systematic investing, you are bound to make money in the long run. That is the reason why I say you have to be optimistic.

But this bull market has lasted more than 10 years? It has been a historic bull market.

That is true for the US market but emerging markets have been going up and down. But do not forget, if I look at the Indian market, I do not look at it in rupee terms, I look at it in terms of US dollars and in US dollar terms it is down.

This year has been quite a no-show.

We love this volatility, it provides great opportunities.


Getting into 2019, I want your perspective, specifically because most of the very influential investors globally whether it is Howard Marks or Ray Dalio, have said that they are getting cautious into the new year.

It is absolutely true about the US market. You have had a very long bull market, consumer confidence is at all-time highs, manufacturers’ confidence is very high and history shows us that when you have those conditions, you have a market correction, you go into a bear market.

Now the degree to how much this bear market goes down is a big question mark but usually we are talking about probably 20% down. This would be a normal correction. But that does not necessarily mean that emerging markets have to do the same because in some ways emerging markets have sort of anticipated already a downturn in the US and what we see is money coming out of the US and going into emerging markets as this bear market in the US unfolds.

But in dollar terms, the worst performing market this year have been emerging markets across-the-board. You are saying that you would be circumspect about the US market but it is really emerging markets where the trouble has been starting off in 2018.

Yes, the US market is down by about 10%, emerging markets by 20-25% but let us look at individual markets, Brazil is up 20% from the bottom in dollar terms. I believe India is going to experience the same condition. You are going to see some very nice returns in some of these markets.

I want to address the unknowns for 2019. The US-China trade deal, What does it mean for the emerging market world because China is so core and so integral to emerging markets performing well?

The good news is that there are going to be winners as well as losers. You have a situation where there is a trade war between China and India which means that some of the manufacturing that takes place in China is going to have to move to other emerging markets which already is beginning to take place. That is why I believe it is a great opportunity for India because India can produce a lot of the things that China is now producing and ship into the US.

We look at the global situation and say okay there is this trade war. China may not be able to export as much to the US but the US is growing at 3%. They are going to demand more and more consumer goods and those goods could come from India. They are already coming from Vietnam, Bangladesh, Turkey, all these markets which have experience and the incredible decline in currency will become much more export productive and more export competitors.

But that will take a while, I am talking from an immediate near term perspective. How likely is the scenario for the deal being inked in the first quarter of calendar year 2019? If that does not happen, President Trump is committed to slapping on the tariffs. How much would that peg back the global growth story which is the key concern for 2019?

Well you must consider this; the US is growing at the fastest growth it has had for many years. Next year, it will be a comparison between 2019 and 2018 and you will probably see a little downturn because you are comparing these two years.

Still, we are probably looking at 2.5% growth for the US which is very fast growth for the size of that economy which is fine for the rest of the world.

China is becoming less and less of an export-oriented economy and more of a domestic-oriented economy and they are still growing at 6% which is incredible growth for an economy that size. We must remember in 2010...

But the Chinese do not want to grow at 6%, they are going to keep the base line at 6% because any tick less than 6% is going to be a shocker for the world.

Yes. That is right. But do not forget, in 2010, China was growing at 10%. Last year or this year, they are growing at 7% or maybe 6%. That 6% is bigger than 10% in 2010 in dollar terms because the economy is much larger.

I am very optimistic about the global growth generally because of these factors and then you have India coming in, Brazil is now growing again. Brazil, India, China, Russia they are all looking pretty good, not bad.

Everybody is eyeing what the Fed is going to in 2019 but do you think that there would be a marked shift in the monetary policy stance taken by key central banks across the world in managing the balance between growth and inflation?

Generally speaking, there is a growing realisation that central banks have become too powerful and have had too much influence on the markets and on economic behaviour generally. Looking forward, I believe the political forces will begin to take over the role of the central banks. In other words, the influence of the people in power politically will begin to encroach upon central bank initiatives and prerogatives which I think is probably a very good thing.

Why?

Simply because the central banks are relying on information that is quite questionable to begin with. Inflation statistics are very questionable. And they are making decisions about interest rates and about all these other very important factors and more importantly the market is paying attention to these things that it is having an undue negative influence on the markets.

But the central banks are in a bit of a catch-22 situation as well was because rates have stayed so low for so long. They are in a state where the cost of capital needs to go up at some point in time but they do not have political support. It is true for the US, Europe and most parts of the world except Japan.

I feel that the cost of capital does not have to go up, it is not written in stone that you have to do that.

But how long can rates stay low?

The problem which we are faced with is that US and Europe, in order to save their banks from the situation they were in with the housing crisis, loosened up too much. They went too far in loosening. So in Europe, there was negative interest rates which is ridiculous. Now they have to dig themselves out of that hole. Which is why I emphasise the fact that central banks have had too much power to influence policy.

My argument is that okay you have dug yourself this hole, do not expect to get out of it in one or two or three years. You have got to do it gradually which is what the politicians are saying. They are saying look we are on a growth track, do not kill this because you are going to start this whole volatile cycle all over again.

So, you do not expect the Fed to move four times in 2019 as they have in 2018?

Let us put it this way. Trump can put enough pressure on them not to do it because it will be a big mistake. It is true of all the countries around the world. I know here in India there has been talk about more pressure on the Reserve Bank and I think there is nothing wrong with that. A lot of bond people in the world worry about what the central banks are doing and they should be concerned, of course. But at the end of the day, what are we talking about? We are talking about economic growth, economic well-being of the people and that means you have got to have a more rational and stable policy level.

Since you have brought it us, what did you make of the drama between the RBI and the government?

It was great because it meant that there is a recognition that what the Reserve Bank does is political, it is just not financial. It is a political story and the fact that they are holding so much excess reserves in terms of GDP of many other countries.

I understand that the two institutions need not to see eye to eye but does the drama have to come out in the public domain?

That is true in every country. Look at what is happening in the US. It is the same situation. There is a tremendous amount of policy talk particularly now that Trump has started his dialogue. There should be a realisation that central banks have a very big political influence and there has to be a political price to pay for these moves that they are making.

What do you think the RBI in India should focus on? We have an important event risk in the general elections coming up in the next six months.

The focus should be to lower interest rates, number one. And number two, I am not against them giving some of that money to the government. Many years ago in the thirties, there was a famous bank robber in America called Dillinger and one of the reporters asked Dillinger why do you rob banks? He said that is where the money is.

What is your view on Indian banks and the financial system especially what has happened with the NBFCs?

We have gone through a tough period and probably now is the time to begin looking at these banks since they have been through this tough times and so we are beginning to look more interestingly at these banks to see if there is an opportunity.

Are you finding opportunities within the space?

Particularly in the smaller, in the non-bank finance area.

Yes, that is where the problem has been.

But we have to look more carefully.

But do you think that a crisis like this is always a golden opportunity to find quality names at lower prices and that is the time to go bargain hunting?

Yes, every crisis, every move is an opportunity. Even during the subprime crisis in America, everybody thought oh, God it is a crisis, everybody is losing money and everything. But there were some people that were making an incredible amount of money in this crisis. You have to look at it that way, find where are the good signs. Where can we have an opportunity and that is true here as well as anywhere else.

Do you think emerging markets have decoupled from developed markets over the course of the last 10 years? India has outperformed all other markets in the world in local currency terms largely led by the strong inflows from domestic investors. Are emerging markets pretty much writing their own story?

The same thing is happening in some of the other countries and I mentioned Brazil as a good example where they have departed quite dramatically from other markets. So yes, there is more and more domestic money affecting these markets, but at the end of the day, we are living in a global environment, global news, everybody is following what the Fed is going to do, what did Trump say yesterday, what is the Russian investigation etc, etc. So, although all news is domestic, there is the influence that you see and for a good reason because the US is the biggest economy in the world and people want to know what is happening in that economy.