Mobius expects India stock correction

India stocks are headed for a correction in the near term, emerging markets guru Mark Mobius said, as the pace of reforms is likely to disappoint.

"There's been a lot of euphoria," the executive chairman at Franklin Templeton told CNBC. "Bull markets end on euphoria. What we're going to see is a correction when the euphoria is over," he said.

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The subcontinent's stocks have certainly been enthusiastic, with the Sensex up more than 22 percent since the beginning of the year amid optimism over the expected reforms from the new government led by Narendra Modi. India shares are trading at around 16.3 times 12-month forward earnings, compared with a five-year average of 14.6 times, according to data from Credit Suisse.

Mark Mobius, executive chairman of Templeton Asset Management's Emerging Markets Group
David Rochkind | Bloomberg | Getty Images
Mark Mobius, executive chairman of Templeton Asset Management's Emerging Markets Group

"People will probably be disappointed by the speed of change so there's a good chance there'll be a correction or destabilization along the way," Mobius said. "Secondly, you're going to see a lot of new stocks coming into the market, lots of IPOs [initial public offerings], which will tend to depress and absorb a lot of the flows that will come in."

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Quite a bit of new equity is expected to flow into India's market in the near term, with Goldman Sachs estimating a pipeline of around $3.1 billion of new and secondary offerings are already announced for the rest of this year. The government is targeting divestments of almost $10 billion worth of shares this fiscal year, which runs through the end of March, Goldman said.

To be sure, Mobius sees the likely correction as a buying opportunity. "That will be the opportunity to come into the Indian market," he told CNBC.

Mobius is also watching for two particular reforms which could spur a flood of foreign funds into the market: loosening restrictions on how much of a company can be owned by foreigners and easing requirements for foreign institutional investors to reveal the names of all their funds' underlying shareholders.

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"The flows actually could double from what we've seen so far if – and that's the big if – the government changes the rules," he said, expecting the MSCI to increase India's weighting in the index following such reforms. "At least half of all emerging market money is indexed," he noted, with any fresh index-based funds likely to help balance and absorb the planned new share issues.

In the longer term, Mobius expects India to be an A-list investment market, simply because of its demographics.

"You have lots of young people coming into the work force and that means that going forward, India has the potential to outpace China," he said. "Double-digit growth rates in India are still possible."

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Of course, just because he likes the India story doesn't mean he's getting his Indian exposure within India's borders. While he likes India's consumer plays, they can be expensive, he said.

Rather than buy shares of Hindustan Unilever, he's getting exposure through its parent, London-listed Unilever PLC. Shares of Hindustan Unilever are trading at around 36 times earnings for the next 12 months, compared with their 10-year median of around 27 times, while Unilever is trading around 19 times, according to data from Thomson-Reuters.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1