interest rates: High interest rates & war often accompany a bull market: Mark Mobius

“A war does not necessarily mean that the markets will go down. The markets could actually go up in this kind of a situation and the reason of course is that the governments start spending on defense and other things and companies grow in the face of this spending. So, there is a bullish market. It is an interesting phenomenon. A war does not necessarily mean a bear market, it means actually a bull market, “says Mark MobiusFounder, Mobius Capital Partners.


What are your thoughts on the nature of risks for emerging markets like India? You have been investing in emerging markets when India was a baby frontier market. How is India placed right now versus emerging markets to face this risky environment?
Mark Mobius: India is in a very good spot now because the Indian macro environment is pretty favorable for the long-term perspective. I would say India is in a take-off stage because incomes are rising, economic growth is very good and technology is having a very significant impact on the Indian economy and the Indian population in general. I would say India is in a very sweet spot.

How prolonged could the global risk be? Some say global central banks’ hands are tied because the nature of the risk is such that beyond a point, hiking rates will not be able to control inflation unless you adopt a sledgehammer approach and completely stall growth. How do you see this being balanced?
The central banks around the world starting with the Fed tend to take a heavy handed approach because they have a model which tells them that to control inflation. They have to raise interest rates higher than the measure of inflation that they are using. Of course, there is a big question mark against this measure of inflation as I have pointed out in my book The Inflation Myth. But anyway let us assume that the inflation rate is corrected in America and it is 8.5% plus which means that real rate has to be positive and the Fed will have to raise rates above 8.5% that is 9, 9.5% or whatever till the inflation rates comes down.

So I would say we are looking at higher and higher rates and I am frankly surprised that people are shocked by the three quarters of a percent rise that the Fed just has instituted. It is not surprising to me at all. They are headed for 9%. We have to get ready for that. However, now the most important point is that high interest rates do not kill markets. Stock markets can go up in the face of high interest rates. Temporarily there will be some impact but in the long run, 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 not yet been cut in the same proportion, which means that there is scope for cutting the earnings estimates of companies downwards. If that does not happen in time, even after the sharp fall, global markets will continue to appear expensive. Is it a justified hypothesis?
Not really and the reason why you have to look at this carefully is the differentiation between various kinds of companies. We are going to see winners and losers in any kind of situation. The winners will be those companies that have a high return on capital, have low or no debt and have earnings growth. They get earnings growth as a result of pricing power. In an environment like this, high debt companies will go under and their market will be taken over by the leaders. These leaders then will have pricing power and will be able to raise prices online with or even higher than inflation.

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So that is one of the explanations why markets go up even in the face of high interest rates because the index is made up of large companies and their pricing power go up in these times.

The Russia-Ukraine conflict has lasted way longer than anybody had thought so far. It may have gone to the fringes of the country but it is still persisting. There is a cold war situation between the US and Europe on one side and China and Russia on the other. Where do you see all this heading?
There is no question that there is a big risk of a nuclear war. It is a risk that has been with us all the time because so many countries now have nuclear weapons and mistakes can be made. This is something we have to look at very carefully. I recently did a little study looking at the Korean War, the 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. The markets could actually go up in this kind of situation and the reason of course is that the governments start spending on defense and other things and companies grow in the face of this spending. So, there is a bullish market. It is an interesting phenomenon. A war does not necessarily mean a bear market, it means actually a bull market.

Nasdaq is down about 33% from the top; it’s almost bear market territory for S&P and Dow as well is down 20% plus after a 10-year long one-sided bull run. Do you think sufficient correction has occurred there or do you see scope for further valuation compression in the US?
We probably have more to go. Nasdaq for example, is down more than 30% and of course one has to pay attention to the cryptocurrencies. Many of us do not realize how many people around the world are looking and invested. I use the word invested very carefully in cryptocurrencies. When cryptocurrencies go down, a lot of people feel poor and Bitcoin as a leading cryptocurrency is down dramatically. It is down further than the S&P or any other index and it is kind of leading indicator.

Given that I believe the other indices – the S&P, Nasdaq – could go down more but then we will have balmy effect and the next bull market will begin. So, it is a great opportunity to buy bargains but you have to be careful and make sure you have companies with a high return on capital, pricing power and earnings growth potential and no debt.

What do you see the future of this crypto asset class after such a big deflation?
Nobody can predict markets and I am not the first to try to predict any market but I would say cryptos have to go down more. Crypto is kind of a religion, it is a faith. When people begin to lose faith, then there is nothing left, there are no dividends, there is no interest being paid, there are no assets except something on the internet,

So when people lose faith, it can go down much lower and can go 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 that is the only thing they have bought. They have not bought anything else, they have not bought stocks, they have not bought bonds, they believe that this is the next great thing and they are going to be out and they are going to be very unhappy.

Now that the current leadership in India is completing eight years in office and is making plans which are 25 years ahead, how do you see the role of a stable government and the kind of stability the country is seeing because India’s role also in global order is undergoing a very slow and silent change?
It is very important and India is probably a very good example, The current leadership is forward looking, exhibiting credible ways. They have adopted and spread technology to every corner of the country. It is an incredible development and it is quite mind boggling. They have done an incredible job.

This is one of the impetus for growth in India as I see going forward. Leadership is very critical and the rule of law is very important. I hate to use George Soros’ words but an open society is very critical I believe because an open society results in creativity and innovation and that is what is really driving the growth of India and other countries around the world.

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