Mark Mobius Highlights India's Market Surge and Investment Potential Amid China's Economic Woes

NOTE: This is a transcript of the interview including questions by the host and responses by the interviewee. Human eyes have gone through the script but there might still be errors in some of the text, so please refer to the audio in case you need to clarify any part. If you want to get in touch regards any feedback, you can drop us a message on [email protected].

GE: Mr. Mobius, thank you so much for joining me today. Firstly, let me wish you a very happy 88th birthday. And it's almost 40 years of investing, as I can see. But one of the interesting things that I noticed and noted is that you actually started investing after the age of 50, very similar to Warren Buffett. So tell us about how things change when you start investing after 50, as opposed to maybe investing earlier in your life.

MM: Well, early in my life, I was too busy studying. And my first contact with the stock was when I did a thesis. My PhD thesis was on communication satellites. And that's when the Communication Satellite Corporation was being formed in America. And so I bought stock, and it did fairly well. So that was the first delightful experience for me. Other than that, I had no idea of what to do in the stock market.

I studied economics, of course, but didn't study the practical aspects of finance. So it was until later on that I began to get more interested in the actual mechanics of investing in the stock market.

GE: And how did you move to managing a fund? And of course, Franklin Templeton was the first big fund that you started with. And then you took it from $100 million to $40 billion. But before Franklin Templeton, how did things move?

MM: Well, I was in Hong Kong, and I was running my own consulting firm. And one of my clients, I mean, I did lots of industrial research. In fact, I was in India doing research for the UNDP for the leather industry

GE: In Chennai…

MM: Yes, many of these different studies…But one day, one Chinese investor asked me to do a study of the stock market. So I, again, had no clue of how to look at it. But I look at the technical aspect, and I noticed in the

Hong Kong market, there was a head and shoulders development taking place. You know, the famous head and shoulders, which is a warning for people to be careful. And I told him that you got to be careful. And it turned out to be correct. So I was very happy. And I said, well, maybe this is something we should look at more carefully. Then I decided to be a stock analyst. And I joined a brokerage firm, a British firm based in Hong Kong. After a few years, they sent me to Taiwan to head up a fund, Taiwan ROC Fund. And then Franklin Templeton came along and said, look, we've got this new emerging markets fund. It was the very first emerging markets fund listed on the New York Stock Exchange. And they said, look, you know, it's $100 million. Would you want to invest? To invest, to be the lead investor, investment manager….

And so I said, this is a great opportunity, global, you know, although I was living a good life in Taiwan. So I said to John Templeton, look, there's only one condition I have. You have to open an office in an emerging market.

And it should be Hong Kong. So we opened an office in Hong Kong. And then we grew and grew, as you know, it amounted to billions of dollars eventually. So that's how I got involved. And it was an exciting time because that was in 1987, when there had just been a market crash. And it was a great time to start because the markets were beginning to pull up again. So it turned out to be very, very good.

GE: And in a few years, maybe about seven or eight years, you were already investing in India. And including in IT stocks, which had just started getting listed, for example, Infosys. Now, what is now, as you look at India then and now, what's changed fundamentally? I'm talking now about stocks, not the entire ecosystem, which of course has changed. And what's not?

MM: Well, first of all, the whole nature of the market has changed because the number of stocks listed has exploded, has increased dramatically. The market capitalization has increased. The size of firms has increased. So when we started, it was difficult to find the liquidity in some of these stocks because they were not heavily traded. And of course, in those days, it was paper. People were carrying the paper from one place to another. I remember going into the custodian and seeing this paper flying all over the place. There was no electronic settlement.

And they had the Badla system. I don't know if you remember. It took three days to settle a trade. So that's changed dramatically. We now have automated trading. It's settled within hours. And of course, the number of stocks has increased. And then you had a new stock exchange, the National Stock Exchange. Previously, it was only the Bombay Exchange. Then you had the National. So all this infrastructure has really improved dramatically in India. And of course, the number of stocks listed and the size of the stocks has increased dramatically. So it's been a big, big change.

GE: And the markets since then have obviously risen, if you draw a line, but there have been meteoric rises and meteoric falls, some coinciding with events like the global financial crisis or COVID more recently, and some not. So if you look at markets today, we are back to a situation where many people feel, and I've said that valuations are stretched. It's become a tighter market to invest in. And this may not be an India problem alone. This may be happening in other markets as well. How are you seeing it?

MM: Well, if you look at India, and of course, I said this about, it must have been about eight years ago, people asked me, where do you want to go? And I said, India, India, India. Why? Because first of all, you have this incredible growth rate. The GDP growth rate is directly correlated to the growth of the economy, economic… companies in the economy. And you have this young population, which is getting richer and richer. So I knew that things were going to do very well in India. And of course, with the downfall in China, India became even more attractive to global investors. But more importantly, the Indian market is driven by the domestic investors, not by foreign investors. And the domestic investors, you know, are now very, very active, becoming more and more active in the stock market. So that's a big, big development taking place. And I see, although some people say, Oh, India may be overvalued. It's gone too far, too fast. I don't think so. Of course, there will be corrections along the way. But the trajectory is definitely up. And it will continue to be that way going forward.

GE: So if you were to look at some sectors within that, now, IT, for example, has seen perhaps a secular growth run since maybe the time you started investing. And in the last couple of years, however, things have changed a little bit. One is, of course, artificial intelligence and so on. But also the fact that, you know, customers who are, let's say, the big banks and insurance companies and retail giants in the West, may be changing the way they work with IT companies or IT services companies. So how do you see, I mean, do you see any secular shifts or changes in the way companies are able to adapt? Or do you see all companies rising with the GDP, as you said?

MM: Well, no, there's no question. There are big, big differences. And of course, the winners are the ones that can adjust and utilize technology. And I'm not just talking about, you know, software companies. I'm talking about industrial companies, service companies, banks, hotels, whatever industry you're talking about. If they're not up to date on their technology, they will fall behind. That's the reality. Because technology is making things faster and cheaper and more efficient. And unless a company is able to capture that efficiency and speed, they're going to fall behind. They'll be in trouble. So generally speaking, when we're looking at an Indian or any company in the world, the first thing I ask is what kind of technology do you have? What are you doing on the technological side? Regardless of what industry it may be.

So one of the wonderful things about India and Indian companies is that they are increasingly using technology. They've been very, very good. And of course, as you know, India is the center of software globally. You know, these big Infosys and Tata and companies like that are global. They're all over the world. So they're learning how different industries in the world are operating. I remember many years ago, I was in Chile visiting a department store. And I went through their offices and I saw a cardboard carton with Tata on it. And I said, what's that doing here? Oh, they're doing our software. It was this department store. So this is the kind of thing that India can take advantage of, the fact to have these companies. Now, the next stage is going to be hardware. You're going to see hardware being manufactured, computer hardware, including chips that are going to be manufactured in India. And India will become a global leader in that area as well.

GE: I'm going to come to chips in a moment, but just to come back to your earlier point on, you know, asking companies, I mean, what's your technology differentiation or how is technology driving your business? So you're saying that effectively, whether it's an aviation stock or an airline or a hotel, or let's say a consumer products company, that question is something that you're always looking for a clear answer to.

MM: Exactly, but you know, in our way of investing, we use a so-called quantamental system. You know, we do the quantitative work and we also do the fundamental work. So in both aspects, we have to use AI because AI is simply a method of gathering a tremendous amount of data and analyzing it quickly. That's the secret to the system of AI and how AI is helping investors. So we use the same system when we're looking at a company or considering a company. We look at what they're using in the AI and we utilize AI to analyze that company and analyze the people who are running the company because at the end of the day, it's about people.

GE: So where has this model gone wrong again in the Indian context?

MM: Well, you're always making mistakes. I mean, because you cannot, there's no way of knowing everything at all times and it's a continuing change.The conditions are changing all the time. And as I point out in my book, emotion is the potion. There's a lot of emotionality involved in the stock market. People make decisions based not on rationale, but on emotion. So that's where it goes wrong because you may do all kinds of analysis and yet the stock doesn't do well because people don't like it for one reason or something happens. So a lot of it is tied to that emotional component, which is not predictable at all.

GE: And at this point, whether again in India or other markets, which are definitely valued high and in any case, most of them, at least India, Japan recently, the United States, they're all at record highs. Most major indices are at record highs. How do you then pick stocks? I mean, does that job become more difficult?

MM: Not really, because we don't look at some of the traditional measures that people use these days.

As you know, a lot of people look at the price earnings ratio, but we consider that to be a more backward looking component or indicator. What we like to look at is, and amazingly, when we do scans, global scans, we look at thousands of stocks around the world. It's interesting that Indian stocks pop out increasingly in terms of their return on capital and in terms of their profitability. So it's quite very interesting. So regardless of what the PE may be, the return on capital is very high, which means their debt is probably very low because they bring in lots of cash. So that's the kind of thing we look at. So we're not too concerned about the level of the market. We're more concerned about the individual stocks and what they're doing in terms of their profitability and their return on capital and return on assets.

GE: And you're saying that this approach has really worked for you in the last few decades that you've been investing, including in markets like India?

MM: Exactly. It really works very well. So you've got to ignore the general level of the market. You've got to ignore the sentiment in the market.You've got to look at the individual company and make a decision based on that, the individual company. Of course, the company is operating within an environment, an industry. You've got to look at the industry. You look at the general environment. But at the end of the day, it's really about return on capital. In other words, how profitable are these companies and how are they in the growth situation? Are they growing?

GE: And at this point of time, again, China has seen more than 6 trillion, let's say, erosion in value in its stock market since the peak in 2021. Now, many of the factors that you spoke of, for example, would have worked for China and maybe continue to. But the overall environment, as you alluded to as well, has deteriorated. So how do you adjust for this? Or how do you try and foresee that? Because what's happened in China, for example, can take out the bottom of everything and therefore, obviously, reduce the value of your investments.

MM: Yeah, the situation in China was very unfortunate, mainly because more and more investors, particularly big institutional investors, are not stock picking. They are buying ETFs, exchange traded funds. So you find that the majority, I would say over 60% of investors are now doing that. They're buying the index. So a lot of people are caught up as a result of the index in China crashing. Now, how do we avoid it? We avoided that…We were not in China because we couldn't find stocks that met the criteria that we use. In other words, we couldn't find stocks that had high returns and had good growth and good profitability. So it's quite interesting when you look at, even now when we do scans, we don't find many stocks in China that meet our criteria. So that's a way to avoid this problem. I mean, there's so many investors. I know we were walking into one large institutional investor and we said, look, we're going to talk about emerging markets. They said, are you going to talk about China? Because if you're going to talk about China, we don't want to talk to you because we lost so much money in China. So a lot of people have been caught up in that.

GE: But that's an interesting point. You're saying that if these stocks in China, and I'm assuming mainland, did not meet your metrics, and yet, of course, other investors have gone in. So that means there was something conceptually and fundamentally wrong with these companies at all times, or at least for a long time.

MM: Exactly. They were deteriorating with a new regime. Under Deng Xiaoping and his successors, things were going very well. Companies could thrive. It was more of an open market. It was open, a free enterprise market. Then with the new leadership in China, that was destroyed. And of course, you could see the effect on companies. Companies become less profitable because they cannot do what they want to do in terms of enterprise. But by the way, if you want to consider Taiwan as China, depending on your political viewpoint, we find many bargains in Taiwan. Taiwan is up there with India in terms of good companies, profitable companies. And of course, the reason is that you've got a free enterprise system with a very vibrant market, a free market.

GE: And that's interesting in terms of what lessons it holds for a country like India. So when you say free enterprise, I don't know if you're including tariffs in your calculations. But in India, for example, tariffs have gone up steadily in the last decade or so. And for sure, many companies, including maybe in resource industries, have become less competitive. So how are you seeing this?

MM: Oh, it's interesting that in India, I guess you being in India don't recognize it as we do, foreigners coming into India. I traveled in India earlier this year. And the thing that strikes me more than ever before is the incredible variety and differences between states. So you may say, okay, the federal government makes this decision and makes a restriction. But what's happening in the individual states is different. There's a lot more freedom in that sense. When you go to individual states, I mean, I call it the United States of India, rather than India, because the differences between states is quite remarkable and allows for a lot more freedom that you would imagine based on just looking at the federal laws.

GE: So when you look at companies, or even industries, what are the aspects of free enterprise that you think are critical and or the criteria that companies should be able to meet in order to qualify for an investment from you or your funds?

MM: First of all, not too many restrictions on how a company can operate, number one. Number two, freedom of expression, freedom of speech. You know, it's no accident that India is so fast growing, because it is a democracy, it's the largest democracy in the world. So a general free enterprise, free expression, freedom to do what you need to do for your company, all these components are so important to create a profitable environment, a profitable company environment. So I think that's really the lesson, the secret.

GE: So if you were to, I mean, contrasting with China, just for my understanding, so for example, if it was an automotive company in China, so where would the constraint be, which in turn, let's say, reduces the appeal of the stock? Is it the ability to expand and grow, let's say, produce more cars, or set the price? Or could it be something else?

MM: Well, it's an interesting case with China. If you look at China, electric automobiles, they're the top of the world now. They're the biggest producer, and they have incredible companies. But why is that? It's because the government has introduced policies which will encourage the production of electric cars. But the problem is, when the government intervenes in that sense, big errors take place. So now you find there's overproduction of electric cars in China. There's quite a lot of corruption associated with all the benefits that come with the government programmes. So that's a problem for the private sector. Now, in the short term, it may look wonderful. But in the long term, it's not healthy for the commercial environment of the country.

GE: And you're saying, and whichever way it goes, eventually, all of this is reducing the ability of the company or affecting the company's ability to deliver a better return on capital employed?

MM: Exactly. Exactly.

GE: So now, if we were to look at India and the other markets, which are some of the older markets like Brazil and some more, let's say, markets that India is being now benchmarked, at least in terms of appreciation, like the United States, how is the world looking to you right now as an emerging market investor?

MM: Generally speaking, it looks very good for emerging markets. If you look at the last five years and the performance of emerging markets, India has outperformed the US market. Taiwan has outperformed the US market. Of course, China has drastically underperformed the US market. So you see these pockets in emerging markets of outstanding performance. And I think that will continue because of the demographic and other factors that are taking place. So I think emerging markets, let's put it this way. Yes, the US market is the largest in the world. You cannot ignore the US market. But if you're a stock picker, you cannot ignore the emerging countries because they're growing faster. There are more opportunities taking place, new innovations taking place. The impact of technology on these companies is much greater. So all of these factors are going to be driving growth and profitability.

GE: So which are the countries today in this consideration set for you?

MM: Still India. India is still at the top. Taiwan is at the top. Vietnam is there. Indonesia is coming up. Those are the main ones at this stage.

GE: And if I were to ask you about asset classes, we've talked about stocks. I know that you also look at other asset classes. So how are commodities looking to you right now? And what's your outlook? And obviously, I'm also asking this in the context of, let's say, iron ore or oil, where prices have fallen to substantial lows, at least in recent years.

MM: Generally speaking, we don't like commodities or commodity companies, companies that have one or two commodities, because they are subject to the fluctuations of the global market. And a lot of this is beyond the control of the management. The manager cannot do anything to ameliorate problems with commodity prices. However, we're interested in companies that service the commodity producers. For example, in the oil area, the petroleum, companies that do the servicing of oil wells, that provide the equipment and that sort of thing. Those companies could be quite interesting, because a lot of technology, …fracking, for example, is a big technological improvement that has benefited many of these new companies involved in fracking equipment and technology. So that's what we look at when we look at commodities. But generally speaking, I would say the future is going to be in service—service industries, tourism. I recently came back from Europe and it's packed with tourists. And of course, once the Indians begin to travel, they're going to be inundating all of these tourist spots. So that's going to be a very, very big development going forward.

GE: And that's happening already, I guess. So if you were to now look at, let's say, portfolio construction in a very broad sense, how are you now constructing it and between geographies, between types of companies and so on?

MM: Well, first of all, in terms of geographies, as I say, would be India, Taiwan, maybe a little bit of Vietnam, a little bit of Korea. And some of Indonesia, that would be sort of the geographical breakdown.

Then in terms of sectors, the first would be chips, companies involved in the software and design of chips. And of course, the companies that are doing the foundries, TSMC, Taiwan Semiconductors, one good example of that.

That would be one category. The other category would be software, because software is developing very rapidly and companies need software services and these software firms are doing very well. The third category would be related to, as I say, services, whether it be delivery services, whether it be a company like Amazon, companies that are servicing the consumer. That would be the next category.

And then finally, some specific industrial areas, I mentioned in the oil industry, but other companies that are industry leaders in various fields.

GE: And if I were to ask you to look back again and contrast with the present, what would you say are some of your best picks?

MM: Well, the best picks came up as a result of that analysis I've talked about, looking at the profitability and growth aspects of the companies, but also more importantly, looking at the management. I found that managements that were committed to the success of the company and were compensated based on the success of the company usually perform the best. And by the way, that includes family-owned companies. There are many of the families that run companies benefit directly from what is happening. Of course, I always do recommend to the family companies to have an independent director so that they get an outside view. But other than that, that's the key to find managements that are going to be committed to the growth and prosperity of the company.

GE: And are you biased in some ways towards family-run businesses, particularly in Asia, I guess?

MM: Not really. No, we're not biased in any way. But when we look at this, generally speaking, I would say maybe half of our portfolio have, let's say, family-dominated companies. They're listed companies, they have lots of minority shareholders, but the majority of the shares are held by the family. These companies are doing very well. But also there are many companies that are minority-owned, but are run by a group of committed leaders who have a stake in the company as well.

GE: And last question. So you are launching another fund in a few months. And so tell us about that fund. And have you wound up an existing fund? And what's the new fund going to be like?

MM: The new fund is called Emerging Opportunities Fund. And we call it Emerging Opportunities because we're not going to be limited to only emerging markets. We're going to look at the global markets, US market, European market, any market in the world because we found that the growth of emerging countries is impacting companies all over the world. If you look at the US, you'll see these big companies are having incredible profitability in emerging countries. So we want to get that exposure as well. But it will be a very restricted portfolio, no more than 30 stocks, maybe even no more than 20, depending on what we can find. And it will be, of course, long term holding. I mean, we will go into a company with the intention of holding it forever if it continues to perform. That is the orientation. Of course, the number one criteria is not to lose money. So we want to use… put options and other derivatives to minimize losses.

GE: And is it going to be headquartered out of Hong Kong?

MM: No, it's I'm here in Dubai. So it's actually headquartered, we will run research out of Dubai, but it's a Delaware registered with a feeder in the British Virgin Islands.

GE: So, you know, you talked about holding stocks for a while. So one of the things India has seen, and I'm sure other countries have seen too, or markets have seen is the emergence or the entry of a lot of young investors, particularly during and after COVID, as people started, you know, you know, investing and the technology also helps them. What's your advice to them?

MM: Be careful. I know that a lot of young people want to become millionaires overnight, and they see the opportunity, and they get excited and become emotional. I tell them, calm down, be careful, don't commit all your savings, be diversified, don't put all your eggs in one basket, and do your homework. Look at the companies, you know, with a very rational view, look at the earnings, look at the management and so forth. Unfortunately, a lot of the young people follow the trend, and look at what everybody else is doing and believe they can, you know, become rich overnight. And that's a big mistake. So I tell them, be careful, be rational, don't run away, don't base it on rumors or what your friends are doing, or what the internet says. Look behind the scenes, and do your research.