Mobius Sees U.S. Stocks Bear Market If Democrats Win House

(Bloomberg) -- A Democratic Party majority in the U.S. House of Representatives could push U.S. stocks into a bear market, and spur a re-allocation of funds to European, Japanese and developing-nation equities, according to veteran emerging-market investor Mark Mobius.

The S&P 500 Index, which has dropped around 9 percent from a record close in September, could fall a further 10 to 15 percent as a Democratic win would create policy gridlock, he said. Current polling suggests the Republican Party is likely to lose control of the House in the mid-term elections on Nov. 6.

“As the U.S. markets go down, money will be in search of new opportunities,” Mobius, co-founder of Mobius Capital Partners LLP, said in an interview in Singapore. “We’re beginning to see that already.”

That shift in fund flows from a Democratic win could help arrest declines in equities outside of the U.S. that, until this month, have been lagging behind their American counterparts. Japan’s benchmark Topix Index and the Stoxx Europe 600 Index have fallen almost 17 percent and 12 percent from highs in late January, while the MSCI Emerging Markets Index has tumbled 26 percent.

There’s “a lot of value” in developing-nation equities after the dramatic declines, Mobius said

U.S. President Donald Trump would find it very difficult to push through policies such as a proposed tax cut for the middle class without a Republican majority in the House, he said. Meanwhile, if the House doesn’t change hands, U.S. stocks are unlikely to rally on the result, Mobius said.

Here’s what else he had to say on emerging markets:

Opportunities

  • Brazilian stocks are likely to rally on Jair Bolsonaro’s victory in the presidential election; Indian, Turkish and Indonesian equities also look promising
  • The other markets in Asia that could be “quite interesting” are Vietnam, where the privatization program could boost market liquidity, and Malaysia, where reforms are taking place
  • Mobius says he likes the consumer-discretionary sector and other areas which look “traditional,” but where technology is leading to operational improvements at companies