Indian market outlook: Indian market won’t test March lows but expect a big correction: Mark Mobius

Are things getting much better in Europe? How difficult is the ground activity and economic activity in Europe?

It is very difficult in Europe. Despite the fact that Germany is opening up more, the situation in Europe is still quite dire and I think it will take time. But you must remember that the cases have been to level off and I believe there has been a build up of natural immunity taking place globally. So even those countries that have not had a lockdown will go through a period of cases rising then flatten out as people get immunity.

There are four factors at play: medical crisis, sell off in crude which we have never seen in the modern world, unprecedented action from the central bank and a huge rise in VIX. These four factors have never come together. So how does one judge what is coming next?

Yes, exactly. You know, I saw it as a wonderful opportunity. In fact when I was in South Africa and the market was tanking and I saw some of the valuations of really great stocks, I started buying. But then I said, look, let us not put all the money in; let us reserve some for an eventual downturn again and as you know, in these bear markets, you get false starts and then they come down again. But I saw it as a great opportunity and for our clients what we are doing is switching to real better quality stocks which we could not buy previously because the prices were too high. So it is a great opportunity to switch.

I think it is also a great time for most emerging markets as the downturn in oil prices is wonderful; few countries like Nigeria suffer but India and China are all big importers of oil. So this is very good for these emerging markets. But the other thing is that we all say you should never let the crisis go to waste and the wonderful opportunity we have now is to begin and accelerate the reforms that were started before the crisis.

So in India, for example, I think Modi has the opportunity now to push through various reforms which would have been politically difficult previously and he can now do that. Good example is South Africa where Ramaphosa the President asked all of the South African airline staff to resign and of course as you know, that airline was losing money for a number of years and was a big drain on the budget. So it is a kind of thing that governments can do to improve the overall long term environment, which I think is going to be very helpful.

Given that we could see at least one fourth of the global GDP contracting, what explains this recovery in markets? Do you think the gains that we have seen in the month of April, especially in developed markets, are here to stay?
Again, you have to look at specific markets and specific companies but in the number of cases, yes, these recoveries will be sustained, particularly in those companies that are benefiting from the downturn. If you take companies that are doing encompassing work, companies involved in the cloud which are now overwhelmed with the need for capacity; those companies would do quite well.

As I said, there is always going to be corrections along the way but I do believe we are at the cusp of another bull market going forward. I think the market and the market participants are going to realise that COVID-19 is curable. In other words, they are coming up with cures, various medicines that you need to work and the vaccine will eventually become the play and as I said, the natural immunisation and mass immunisation is taking place as we speak. So I think that is what the market is taking into consideration.

The other aspect of course is the incredible liquidity which is being poured into the global economies, not only at the individual country level but at the international level. The IMF and all of these international organisations are doing to feed liquidity into these markets and that is another reason why you have got to really think about equity so that you are in an asset that is going to be moving with a rise in inflation.

What are the chances that global markets and the Indian market could retest the March lows?

There is a chance of that happening but I doubt that if we’ll go below the lowest point that we have witnessed but there will be corrections along the way; no question about that. I think one of the reasons for this would be the earnings numbers that come in at the end of this year. People will begin to say, oh God, I did not realise the earnings downturn will be as bad as this and then they will say I bought some at the bottom, I better get out now and take my profits. So you are going to see that kind of correction coming along. I do believe we have already witnessed a bottom.

One of the reasons for my trepidation is I have just done a study of all the past bear markets and emerging markets and the developed markets since 1987 and the average downturn in all these markets was about 30% in dollar terms and as you can see, we have not reached that. We have not gone down that far; so you always have to keep some powder dry in case history repeats itself.

So you will not stick your neck out literally and say that the worst is behind us despite the positive factors which you have alluded to on the medical front and the economy front? You still feel that a retest of March lows cannot be ruled out?

I do not think the March lows can be repeated but I think we could have a pretty big correction. Do not forget some of these places the market has gone up by almost 20% or more than 20%; you know we define the bull market as a 20% rise. So in some cases, I might say we are in another bull market but that is quite a big correction on the upside. So given that, I think we can have the same kind of correction on the downside.

In India they were forced to close some debt funds because of the liquidity crisis. Do you think we could be in for a 2008 kind of a scenario in making because cash flows are difficult and in terms of NPAs, it would go higher and delinquencies will also move higher. So what may look like a medical crisis could end up becoming liquidity/credit crises by the time things blow up and by the time you progress?

We really are in such a crisis and the difference between the financial crisis we had previously was that the banks were the problems. Now the banks are the solutions. In other words, when I talk about banks, I talk about central banks and multilateral banks. Now we are in a situation with the liquidity crisis; there is no question about that. Many companies will go bankrupt if they have not given assistance. So the good news this time around is that governments’ multilateral institutions are reacting before the crisis gets too bad and are refunding a lot of these institutions and of course, they have turned. The local banks are refunding the companies that have financial difficulties; so it is quite a different situation than we had during the financial crisis.