Brace yourself, market is likely to get even shakier: Mark Mobius

India is well-positioned to take over the global supply chain from China, said Mark Mobius, chairman of Mobius Emerging Opportunities Fund. In an interview with Himadri Buch, the veteran emerging market investor said India must act quickly to ease investment and trade-related bureaucracy. Edited excerpts:

There is a lot of uncertainty in the market on account of Donald Trump's flip-flops on tariff policy. What are your thoughts?
You can expect more uncertainty in the market as Donald Trump is negotiating. He has got a pile of trade deals to sort out before his 90-day timeout on some tariffs runs out. And let's face it, when you are negotiating, you have to give something to get something. People who have worked on trade deals in the past say this kind of rushed timeline brings all sorts of complications and roadblocks. So, brace yourself, the market is likely to get even shakier.

Where does India stand in this? Can India decouple from what's happening globally, as people are talking about?
No. Everybody is in the same soup. Nobody can generally escape. India will be entangled more in the global trade war because it will become a major supplier going forward. India is in a very good spot. It is in a position to take over the supply chain from China. But India has got to move quickly to liberalise the system for investment and also liberalise its trade system. To export, companies must be able to import machinery and other components and, right now, that is very difficult because of the bureaucracy involved in setting up businesses in India. So, this is an urgent requirement for India to address. If they ease the system, it will encourage global players like Apple to set up their own factories and manufacture in India.

The US bond yields have been rising, and the dollar has weakened in the midst of the trade war. Is that a reason to worry?
Not necessarily. What is interesting is that the dollar is weakening, and a big reason behind that is China. They have been selling US treasury bonds quite aggressively. Now, since China is the second-biggest holder of US government debt, this kind of move shakes things up.

So, when China sells these bonds, it gets paid in dollars. That puts pressure on the dollar and pushes US interest rates higher. China is basically using its bond holdings as a bargaining chip. They are trying to put pressure on the US during trade negotiations. By the end of this process, the dollar should settle.

Do you see a US recession?
Yes, there will be a recession in the US, maybe because the money supply is not growing at a good rate. A recession will happen, but not last for very long. It will last for a quarter or so. Trump will definitely take some action to make sure it does not drag on. What is the worst-case scenario that you are warning of?

The biggest worry I have is that Trump is not able to succeed in his trade policies. I hope that he can convince Europeans, India and other countries besides China to come to the table and work out a deal whereby there is fair and equitable trade.

There is no question that the US has been very liberal to other countries, which is why the US suffers a trade deficit with almost every country in the world. So, this kind of situation is not good for anybody.

Hopefully, Trump will be able to make a success of the trade negotiations. Fed chief Jerome Powell indicated US inflation will be high and growth could slow down while Trump called for Powell's termination. What should investors make out of this?

Trump wants to keep inflation high and at the same time not impact growth, but they can't do both at the same time. If the Fed raises interest rates to tame inflation, then the economy suffers. He realises that high interest rates will be bad for the economy. There is also a possibility that Powell could be replaced by someone who is more aligned with Trump's views.

A lot of global investors are uncomfortable with India's valuations when growth is slowing down and the rupee has been under pressure. What are your thoughts? I am not worried about the rupee, as a weaker rupee makes India's exports more viable. The slowdown is temporary because the fundamentals of India are so good.
India has already surpassed China in terms of young population. I remain optimistic about India's long-term potential, with its large and young population being key strengths. China has had its own set of internal economic issues and now the trade war.

What is your outlook for China? China is in big trouble. China has built an incredible infrastructure in the country, but they are in big trouble as they are so dependent on the US for trade. They are trying to get around it by transhipping to other countries like Vietnam and even India. The US realises that and is cracking down on China's behaviour.

Internally, China also has its own set of challenges, particularly between China and Taiwan, adding to the uncertainty. We are cautious about China because of the trade war, and the geopolitical tensions only make the outlook more uncertain.

Do you see gold continuing to rise after all the recent gains? One should hold gold for the long term, and uncertainty works out very well for gold. With geopolitical tensions and fears of a slowdown, investors are turning to gold as a safe haven. What would be your advice to investors in such uncertain times? Invest in good stocks with low debt, companies that deliver return on capital, return on equity and consistent earnings growth. Once trade negotiations in the US are over, everything should settle.