EM investing veteran Mark Mobius shares his insights on the burgeoning entrepreneurial ecosystem in India, underpinned by venture capital money. He stresses the importance of cautious and discerning investment, emphasising the need for a history of earnings and proven business models over speculative ventures. Mobius also advises retail investors to remain vigilant amidst the euphoria over the listing of new-age companies. His perspectives provide a balanced view of the opportunities and risks in today's dynamic investment landscape. In an interaction with Fortune India, Mobius cautions that the bull run could end up disappointing a lot of investors.
What is your understanding of the flourishing entrepreneurial ecosystem in India, backed by VC money? Do you see inherent risks building up?
The one thing that people have to realise is that if you look at the history of startups, new businesses have a very high failure rate—out of a hundred, 99 fail. This is true in India, America, Europe, and wherever you go; that's the reality.
As an investor, you've got to keep that in mind. I'm quite shocked when I see people come along and say, "I want a hundred million dollars for my company." And you ask, "What's your earnings?" "Oh, we have no earnings." "What are your sales?" "We have no sales yet. It's an idea."
That's something I'm not interested in investing. I'm not going to invest large sums in such ventures. Investors need to be cautious and discerning when evaluating startups. While the entrepreneurial ecosystem in India is flourishing and backed by VC money, inherent risks are always present due to the high probability of failure in new businesses.
But it looks like the public market too is behaving like a VC, willing to pay a premium for new-age companies with no cash flows. How are you reconciling with this growth investing philosophy?
I'm not a buyer. I want to see a history, records, and actual earnings. Don't rely on hope—rely on facts. Occasionally, you may want to put a little money in a new venture, but don't rely on that for success. The chance that such a business will fail is very high, so you have to avoid these kinds of hopes and promotions.
We are seeing quite a few IPOs, or new companies, hitting the markets. First of all, India is now experiencing a bull market. It's had a bull market for quite some time now, and in a bull market environment, you will see a raft of IPOs. In fact, India is now going through a record number of IPOs, initial public offerings.
In this environment, it's even more critical to remain cautious. The euphoria and optimism can drive irrational investments, but maintaining a disciplined approach and focusing on companies with proven track records and actual earnings is essential for long-term success.
What does that mean?
It means that there's a lot of euphoria, a lot of hype, and a lot of hope. In these conditions, it's not a good idea to be a buyer because much of the buying will be irrational, and many of the new ideas will be irrational.
I always go by the dictum: you must buy when others are despondently selling, and you must sell when others are greedily buying. We're now in the greedily buying stage for these IPOs, so you have to be very, very careful because many of them will fail.
Do you remember the story about Mr. Charles Ponzi? People made money with him if they got out in time. So, there is that opportunity where you can jump onto the bandwagon, but you must know when the crowd is herding that it's time for you to get out and take your profits. Unfortunately, most people don't have that opportunity because their psychology does not allow it. They always think with the crowd and believe it's going to go on forever. Of course, it never does.
But with strong domestic inflows, do you think that we are in a structurally strong bull market?
Nobody knows when there will be a correction. We know that there will be a correction, and when it comes, a lot of people will be disappointed, and a lot of people will head for the exits. When that will be, we don't know, but it will come. It always does, particularly in a euphoric market where companies are getting listed with no earnings.
So again, I would advise people to look at the numbers. Don't be lured by the fancy hopes and dreams of people because that's when you will get caught.
You have mentioned that in today's geopolitical environment, the term of EM investing has changed.
One of the things I found over the years is that, when we started in 1987, emerging market countries were the low and middle-income countries. That included all of Latin America and all of Asia except Japan, Australia, and New Zealand.
This has changed because a lot of the emerging market countries grew so fast that they have become developed markets. For example, Korea has a per capita income higher than Spain. So that's one thing that changed dramatically.
The other change is that companies in America and Europe have gotten more and more of their earnings from emerging market countries. We look at American companies and find a substantial amount of their earnings and supply sources are from emerging countries.
So the picture is very mixed. That's the reason my new fund is called Emerging Opportunities. I will not just concentrate on emerging market countries, but I will look at companies around the world, whether they are in the U.S., Japan, India, China, or elsewhere. That's the big change that's taking place.
Let's talk about the China versus India debate. If we look at the gross USD returns of the MSCI China index vs MSCI India since inception, China has made practically zero returns and it's 8% for India. Yet, China remains the preferred market among investors.
First of all, you must remember that China’s GDP was growing at 10% in 2010. When you're growing at that rate, the economy expands at an incredible pace. As a result of these years of high growth, China's economy is almost as big as the United States'. Now, can the U.S. grow at 10%? Absolutely not. Can it grow at 5%? No. An economy of that size is lucky if it gets 5% growth. And that's true of China. But that doesn't mean China's story is over. China has developed incredible infrastructure as a result of this growth.
They have a higher standard of living, and the wages of Chinese workers are much higher than in other parts of the emerging markets world. So, there have been a lot of these changes. It doesn't mean the China story is over. They're moving now into a high-tech society where the opportunities are going to be more in technology.
Now, India is moving in the same direction. In other words, India is now where China was, let's say, 10 years ago and is growing at an incredible rate. India will continue to grow and become much larger. The economy will become much larger.
What happens when you get an economy that's growing at that rate? First of all, investors begin to take interest. For example, India bonds being added to the JP Morgan bond index means you're going to see an incredible flow of money coming into India bonds. The same is true of direct investing. But the challenge for India now is to make sure that they attract this investment and make it easy for this investment to come in.
For example, I just read that Chinese companies are having trouble bringing in Chinese technicians to India because of visa restrictions. India has to prevent this kind of restriction because you want these Chinese engineers to come in and build the plants so that you'll be able to learn as the Chinese learned from the Americans and others. This will enable India to build these plants and grow at a much faster pace. So, that's the challenge that India now has. They've got to open the doors not only to Chinese but to investors from all over the world. Make it easy for them to come in, build factories, and build plants because they want Indian exposure. They want to have the Indian workforce work with them. That's going to be an incredible opportunity for India.
Barring China, with whom India has a frosty relationship, the country has pretty much opened its door for investments from just about every country.
India is still absorbing a lot of investment from China, but I think it will grow faster if they make it easier. That's important. It's also very important to remember this: there are Chinese people, and there's the Chinese government. These are two different things. A lot of Chinese people are not necessarily in favour of their government and are not ambassadors of the Chinese government. So, it's very important to remember that. When I'm investing in China, I'm investing in the Chinese people, not the Chinese government. This distinction is critical to keep in mind.
Do you see India gaining advantage with its China+1 strategy?
It will click for India. India will become a major global supplier of consumer goods and manufactured goods. India has already shown incredible capability in exporting software; you see Indian software companies all over the globe. Additionally, many industrial companies in India are exporting globally.
This will expand dramatically as more and more tech companies move into India. The China+1 strategy will significantly boost India's position as a global supplier, leveraging its growing industrial and technological capabilities.
Do you see inherent risk building up for the markets in general, given that everyone seems to say that the U.S. economy is going to, at some point, fall off the cliff?
I am sure the U.S. market will definitely fall off the cliff at some point. We don't know when, but it's all about money supply. If you look at the money supply in America, it's at a very high point—a historically high point. It came down a little bit, but now it's going up again. So, if you have that much money supply around, people are going to be spending, and there will be a feeling of prosperity.
It remains to be seen if this continues, but the risk is certainly there. The excess money supply can lead to inflated market conditions, and when the correction happens, it can be significant. Therefore, it's important to remain cautious and prepared for such eventualities.
Is it because of all the buzz around tech stocks and, of late, around Nvidia?
Well, in the case of Nvidia, it's all about AI and the demands for artificial intelligence capability. Globally, there's an incredible demand for high-volume, high-capability semiconductors, and Nvidia supplies that, which is why they're so successful.
More and more companies will benefit from this going forward. This is driving the process of innovation in the AI space, which means more and more data will be able to be analysed at a faster speed. It's an incredible development. The demand for AI and advanced semiconductors is fueling this tech craze, and companies like Nvidia are at the forefront of this transformation.
However, while this presents significant opportunities, it's essential to approach this with a balanced perspective. The excitement around AI and tech advancements can sometimes lead to inflated valuations and speculative investments. Therefore, investors should remain vigilant and consider the underlying fundamentals and long-term prospects of these companies.
Now that you're starting off with your fund, would you be a buyer in Nvidia?
I would look at Nvidia, but more importantly, I would look at the companies that benefit from these high-volume, high-speed chips, as well as the suppliers to Nvidia. Nvidia does look very good, but my focus would be broader, including the ecosystem surrounding Nvidia. This includes companies that support or are supported by Nvidia's technology, as they stand to benefit significantly from the ongoing demand for advanced semiconductors and AI capabilities.
While you have defined your fund as an Emerging Opportunities Fund, has the investing framework changed too?
The investment framework stays the same in the sense that we're looking for undervalued companies. We're looking for high-capability management and companies that are very strong financially—in other words, they don't have debt. These basic principles are still in place. Our focus remains on identifying and investing in solid, well-managed companies with strong financial health and significant growth potential.
In India, where do you see value or which sectors do you see value in?
The most interesting sector in India right now would be infrastructure-related, because India needs to accelerate infrastructure building. This includes railroads, power plants, roads, bridges—basically any infrastructure. India has incredible requirements in that direction, so that would be one area to look at.
While I may not be as fascinated by the hype around the new-age narratives, I'm certainly interested in companies that use advanced technology. Infrastructure companies that are incorporating AI and other technologies are particularly important. These companies can significantly enhance efficiency and scalability in their projects, making them valuable investments.
What are the inherent risks that you think are building up for the market in the coming years? Will it be increasingly geopolitical volatility?
We will always have a volatile geopolitical environment, and currently, it's probably the highest volatility we've seen in a long time. That will continue, but as you know, the market continues to do well despite this.
What is going to determine what happens going forward is money supply. If governments begin to restrict money supply, then you could see these markets fall back. We have to watch that very carefully.
