Two factors that can propel the market to record highs are earnings growth and flow of domestic savings into financial assets. “As the per capita income rises, more and more people will have access to the stock market and bond market and therefore the liquidity and trading turnover of the small and medium sized companies will rise,” Mobius said.
Earnings growth will be dependent on the implementation of the goods & services tax (GST). “After the implementation of GST, if earnings surge, then we can justify doubling and tripling of our allocations towards India,” Mobius said.
“When we talk about GST, we talk about what impact that can have on the earnings of these companies. We have to be flexible and look at each company on an individual basis. In some cases, it will lead to as much as 10-20 per cent increase in earnings and that can be very significant,” he said.
“The full implementation of GST could come by FY19 and in the next three or four years, you can see 20-30-40 per cent increase in earnings with the proper GST implementation,” Mobius said.
There are also other factors which can play a key role in pushing the market higher. One major factor would be the interest rate cycle, which can help companies bring down the cost of capital and kickstart the investment cycle.
“I think by the middle of next year, we could hit all-time highs and Nifty50 could scale the 13,000 mark, probably because by that time the GST impact will really begin to feed into the system if everything goes the way they are expected to go," he said.
Mobius sees green shoots in the Indian banking sector and is it his top pick this Diwali. “One area that deserves mention is banking, because you have a growing country which reflects on bank earnings,” he said.
The Reserve Bank of India has been very astute and disciplined in making sure that banks account for their non-performing loans, and that is a very positive combination if we compare it with other countries.
There is now discipline in the banking system and the central bank is looking at the banks carefully to make sure their capital requirements are well within limits and should not exceed.
“Also, so many people in India do not have bank accounts yet and that is going to be growing with the identification card system coming into play that will be a big positive for these banks,” Mobius said.