A slide in emerging markets provides a good buying opportunity for some countries and stocks but falling interest rates will lead to irrational capital allocation and an eventual crash, said Mark Mobius, the founder of Mobius Capital Partners.
Investors should allocate about 10% of their assets in physical gold, Mobius, who manages about $4 billion in assets, told the Reuters Global Markets Forum in an interview on Saturday.
Mobius, who is in Mumbai to promote his book "Invest for Good," also said cryptocurrencies would gain in favor.
Following are edited excerpts from the conversation:
Q: August was a horrible month for emerging markets. How would the remaining year shape up? Do you see this a good buying opportunity?
A: Yes, I do think that it is a good buying opportunity for some countries and stocks. It is important not to draw global conclusions since each sector, country and company are experiencing different impacts as a result of the various activities taking place.
Q: With dovish central banks across the world, how do you see global capital moving?
A: It will become easier and cheaper for companies to borrow for expansion and acquisitions. This will drive growth for a number of countries and companies. Of course, the rise of zero or negative interest rates holds risks since the allocation of capital will no longer be rational, but driven by central bank policies. Such an environment in the short term leads to euphoria and growth, but over time will lead to recklessness and an eventual crash. But in the meantime, as the former president of Citibank said: "As long as the music is playing we have to dance!"
Q: On a country level, which ones excite you the most?
A: We are most bullish on the Indian market because of the Modi reform, but also because of the incredible growth potential of over a billion people being lifted out of poverty. The consumer market in India will be growing rapidly and drive economic growth in years to come. With the problems China is facing with exports, India has the opportunity to acquire some of that business. India has shown its ability to export software around the world, now they will be able to export manufactured products to a much greater extent.
Q: What is your view on gold? In the world of central banks going dovish and negative interest rates, is gold the best safe haven option?
A: I believe that investors should allocate about 10% of their assets in gold - physical gold. The reason is that gold maintains its status as a currency - a currency that has stood the test of time. There is a growing realization that the supply of fiat money is growing at a rapid pace not only because of central bank activities to drive down interest rates by printing more money but also because of the rapid and inexorable rise of cryptocurrencies. No one really knows how much cryptocurrency has been created. There is a whole generation of people who have faith in the internet and cryptocurrencies. They are beginning to realize that fiat currencies like the U.S. dollar and euro really do not have anything behind them except the faith of the public. Given the increasing credibility and faith in cryptocurrencies, they will gain in favor as a currency, but there will always be a lingering doubt and the need for gold as a safe haven.
Q: Moving on to your new book, what returns do you see coming from active ESG (environmental, social, governance) investing in emerging markets? How does that compare with investing where ESG is not a factor?
A: The research done thus far indicates that companies with a high ESG ranking perform better than companies with low ESG rankings. The difference can be quite significant and be as high as 5%. Returns will vary from year to year but over the long term we expect that a 15% to 20% return is possible. Companies that are not ESG compliant will find it increasing difficult to attract investors and customers. The world of the internet exposes company practices for the world to see and people become aware of non-compliances and abuses.
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