For Mark Mobius, there might be worse to come even after the US fired new shots in its trade war with China: a further 10 percent drop in emerging-market stocks and a global financial crisis.
“There’s no question we’ll see a financial crisis sooner or later because we must remember we’re coming off from a period of cheap money,” the veteran investor in developing nations said in an interview in Singapore. “There’s going to be a real squeeze for many of these companies that depended upon cheap money to keep on going.”
Tighter liquidity as the US Federal Reserve and European Central Bank normalize monetary policy has weighed on emerging markets this year, along with the rising US dollar and deteriorating trade backdrop.
The dispute between the US and China would probably worsen as US President Donald Trump is unlikely to suffer much blow-back from his tariffs, as their inflationary impact would be matched by rising US wages at a time when unemployment is low, Mobius said.
The MSCI Emerging Markets Index would likely fall another 10 percent from current levels by year-end, said Mobius, who left Franklin Templeton Investments earlier this year to set up Mobius Capital Partners LLP.
Such a dip would tip the gauge, which has fallen about 16 percent from a peak in late January, into a bear market.
The currencies of emerging nations have also been under pressure, with the MSCI Emerging Markets Currency Index dropping about 6 percent from a high in late March. That is forcing central banks from Turkey to Argentina and Indonesia to raise rates to defend their currencies.
While the rate hikes are a “short-term fix,” they could be counterproductive for countries with high amounts of debt, Mobius said, adding that governments need to put their finances in order so that investor confidence is restored.
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