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 actually could go up in this kind of a situation and the reason of course is that the governments start spending on defence 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 Mobius, Founder, Mobius Capital Partners.
Mark Mobius: India is in a very good spot now because the Indian macro environment is pretty favourable 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 important 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 often are accompanied by high interest rates and rising interest rates, I might add.
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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 favourable 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 important 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 often are 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 still have not 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 in line with or even higher than inflation.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.
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 in line with or even higher than inflation.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 actually could go up in this kind of a situation and the reason of course is that the governments start spending on defence 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.
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 actually could go up in this kind of a situation and the reason of course is that the governments start spending on defence 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.
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