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Finance Minister Nirmala Sitharaman will present her first budget tomorrow the biggest challenge before her is to boost economic growth without a significant compromise on fiscal prudence so what do foreign investors expect from the government this time to discuss this we are joined by mark Mobius partner and co-founder at Mobius Capital Partners joins us from mob studio and Singapore and is a veteran of arguably many Indian budgets and many emerging market budgets as well mark good having you thanks so much for joining in what's your sense the first budget of the new NDA government they probably have the levy in the parliament but do they have the levy on the balance sheet to spur growth in the Indian economy well the good news is a woman in charge and I think that's probably going to be a very good thing for the budget I could get a woman can watch those pennies very more much more carefully but I believe the government has a lot of room first of all they can lower interest rates further you know you look globally interest rates are headed down almost everywhere in Europe it's a negative rate it's just insane what's happening but the reality is it's very good for for India the other thing is I believe that the Indian government could afford greater deficit I believe three and a half I think it is now against GDP could go up and they have a lot of room I believe they could go to five all right so there's a lot of leeway but the bottom line is how the government is going to spend this money going forward that and how they're going to increase but two things one employment and infrastructure spending so just just let me get this clear you know when we talk to our Indian economists a print of 3.4 which was the estimate fiscal number if that gets pushed to three point six that could have a negative setback but you're saying even if it goes up till five it's not that bad exactly because you have a fast-growing economy the economy needs more and more finance I mean if you look at infrastructure spending in China compared to India yeah India is about 15 percent of what China spends and India's and not 15 percent of the population in China so India has to do a lot more in terms of infrastructure spending and by doing that it will boost productivity and it will boost the economic growth of the country and therefore the deficit will not have a big problem because the government will be bringing in more taxes but that too is a bit of an issue right now because you know there are tax collections have not been up to the mark which puts their FY 20 projects ins in question so if you're talking about expanding your you know the fiscal deficit number you need to back it up with the income from somewhere else right well I believe that another factor is privatization of state-owned enterprises I think the government can bring in a lot more income by selling off a lot of the state enterprises or at least selling off parts of them which will do two things first it'll help the budget and secondly it'll increase productivity so I think that's one area they have to look at but don't forget we're looking at short term yeah short term there are problems with tax collection but long term I believe if the government is able to make the your Oxley more efficient that'll be not a big problem if they have to make it easier and with less bureaucracy and make it almost automatic paying of taxes mr.
Mobius sucked just a point because you look at so many emerging market economies and you've looked at them for so many years if indeed there is a fiscal slippage that happens from the path that was earlier guided to but it is used for a presumably spurring growth you believe foreign investors will not be perturbed the other fear of course is that rating engines might come in and have some action on their rating on India as well even that to your mind will not deter a foreign investor I don't think so of course if the rating agencies put India into the B minus or C class then that's a different story but I believe that that's we're not going to be a big issue the big issue for investors is growth and infrastructure of course contributes to this growth so important and unemployment there those are the big issues that have to be a tackled by the government once those are tackled then all the other issues will take care of themselves what about happy let's work with an assumption that there is some minor tinkering on the place and that is used to spur growth and there are no other major large negatives in the budget it does India then look favourable what would you believe that India would largely remain a bottom up story irrespective of what happens to the benchmark indices because I believe that was your view the last time well I believe you can see what's happening is the benchmark the the index the for the stock exchange is doing very very well and that means that investors are having a belief that India is on the way they're going to make the changes that will be very good for the economy so I don't think that's a big issue where I think we have to see now is some real very forceful movement on the part of the government to bring these issues to the fore and identify where the growth can be of course they are giving these payments to the farmers which is good a short-term move fine but in long term they have to tackle the unemployment issue and that means you've got to have people building infrastructure and of course bringing them into the urban areas which which brings me to my next question which was an industry that you like infrastructure as an industry something that you have been liking for some time now particularly you know the pipe makers and steel manufacturers and that was our conversation last time is that a space you know which is still a favorite and on the back of the fact that you could see some favorable budgetary announcements with the push to infrastructure does that continue to remain an overweight for you yes that's continuing to be overweight and we're looking at of a number of companies in those areas infrastructure related you know dimension pipes cables that sort of thing the other pocket office also that you know you have been talking about has been the NV FC space now obviously the liquidity constraints may not be as bad as they were some time ago but it's still bogging down the system do you think that you know now is the time to probably start picking and choosing from the leftover good quality and BFC names and starting to add more weight in each individual portfolio I'm glad you mentioned that because that's the other area we're looking at the non-bank financial institutions we believe that for some bargains in that area as a result of the problems they've had and of course with liquidity coming back with the new reforms these companies should do fairly well a by the way don't forget these payments to farmers which will be coming in will improve consumer companies and that's the reason why you see many of these consumer oriented companies stocks doing so well but that also means that these companies that are serving that sector will be able to pay their back their debts and that will help the non-bank financial institutions mr.
Mobius you're India dedicated funds which you said have started focusing on the smaller companies smaller mid-cap and small-cap names has there been any material change in terms of adding new stocks from any particular sector or starting to gain weight from any particular sector well I would say those infrastructure related companies manufacturing companies are the ones that we've been adding to very selectively you must remember our fund is very focused and we also want to focus on corporate governance we want to help companies improve their corporate governance and so we have to pick very very carefully which companies we deal with because some companies are not interested in making changes and we only want to deal with those companies that are going to make changes in their governance do you think this is the bigger problem in the current standing where we've been seeing the kind of companies that have been faltering on corporate governance and being totally punished by the investors definitely it's a big big issue not only in India it's a global issue corporate governance is now coming to the fore because ESG environmental social governance issues are now foremost in the minds of investors I just came back from a trip to five major cities in America and everyone we talked to said look what are you doing in terms of the environment what are you doing in terms of social factors and so forth and in order to impact those two factors environment and social you gotta do something about governance so we want to talk to companies that are willing and able to improve their governance so would that tip the scales with regards to the earnings projections of those companies versus corporate governance definitely because what we found is that companies that excel in ESG perform better of course you can buy index stocks that have the high rating already but what we're interested in those companies that are willing to improve their rating so that they can see an improvement of their stock price as well okay let's talk about you know the infusion of liquidity now and you know over the last few months we've been seeing the foreign institutional investors been sitting on the sidelines for a bit US equity markets on the other hand making record highs and anticipation of rate cuts from the Fed this month do you see with you know all this excitement around US equity markets the incremental capital will actually stay in u.s.
rather than come to the emerging markets no because in talking to investors in America and that investors globally who are heavy and US stocks they realized that they're vulnerable they have to diversify everybody is in these ETFs for example they change traded funds they want to get into active managed funds to diversify and reduce their risk so I believe that as a result of interest rates in America moving down and as a result of people being overweight in America then they're gonna see some money going into emerging markets and already we're seeing the performance of the emerging markets fund doing a lot better mr.
Mobius one last question from meiyan how have you read into this whole love-hate relationship between US and China and now that it is showing presumably showing some signs of resolution let me choose my words carefully would you believe that there is a bit of a risk one possibility that could emerge in a big way I don't think it's going to be a big big issue because I believe both sides realize that if they go too far it'll hurt harm both I believe however that the US has a little bit of an upper hand in the sense that the trade deficit that China that has China has imposed on the US where the US has huge trade deficit 300 billion plus that means that America is a but stronger bargaining position nevertheless I don't think Trump will go too far he will want to make sure that no there's not too much harm done the US trade as you know the meeting they just had resulted in some concessions on both sides so I believe that would be okay nevertheless a lot of business from China particularly in the high labor area is moving to other countries to Vietnam to Bangladesh and hopefully also to India forward so I believe that is going to be an opportunity for India mr.
morbus at this point we've seen different asset classes also looking interesting from an investment standpoint Gold has started giving returns after really long we've seen the money markets in the u.s. working well for investors so compare that to equities as an asset class which is already trading at extremely elevated levels record highs on the equity markets new capital does that go into any other asset class do you diversify well you know you've been hearing about the face book plan for a virtual currency Bitcoin price as you can see fluctuating I think they've been moving up recently so that's a totally new area which is creating lots of question marks and I believe one of the reasons why gold is moving up is people are beginning to think well maybe maybe we should you know avoid some of the these spiritual currencies and put something into gold because of these virtual currencies being to take over we really don't know where they whether where the valuation will be and you can see the tremendous volatility of Bitcoin is a case in point but but you wouldn't you wouldn't pull money out of equities to put into commodities I know no I believe that equity is a way to go particularly at this stage but please remember that commodity demand is still moving up you know a lot of people look at these commodity charts and they look at the price or the volume in terms of cost but they don't look at the actual physical volume and the physical volume of most all these commodities is continuing to move up which means they're continuing demand for all these commodities alright there's a möbius one last question before we wrap up this interview the last time you said that you are ready to put much more money into India as compared to China as well even if the valuations looks is that still something you stand by yes yes in fact if you look it up what fo you see China is still a little larger than India but India is moving up as you know we had a late start we had to get permission to move into the Indian market and that took time and now we're catching up well we hope that the city stage is set for you to have a very favorable time in your new role in India mister movius thanks so much for taking the time out and speaking to us at Bloomberg quint thank you
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