Mobius Says Trade War Is Just a Warm-Up Act for Financial Crisis

(Bloomberg) -- For Mark Mobius, there may be worse to come even after the U.S. 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 Federal Reserve and European Central Bank normalize monetary policy has weighed on emerging markets this year, along with the rising dollar and deteriorating trade backdrop. The dispute between the U.S. and China will probably worsen as President Donald Trump is unlikely to suffer much blow-back from his tariffs, as their inflationary impact will be matched by rising U.S. wages at a time when unemployment is low, Mobius said.

The MSCI Emerging Markets Index will likely fall another 10 percent from current levels by year-end, predicted Mobius, who left Franklin Templeton Investments earlier this year to set up Mobius Capital Partners LLP. That would tip the gauge, which has fallen around 16 percent from a peak in late January, into a bear market.

Developing-nation currencies have also been under pressure, with the MSCI Emerging Markets Currency Index dropping around 6 percent from a high in late March. That’s 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 counter-productive for countries with high amounts of debt, Mobius said, adding that governments need to put their finances in order to restore investor confidence.

Despite all the gloom, the 81-year-old investor sees the slump as a buying opportunity and is seeking to raise funds. Brazil and Turkey could benefit from a trade war due to declines in their currencies, Mobius said in a separate interview with Bloomberg TV on Wednesday. India, South Korea and Vietnam could also do well from the rising protectionism, he said.

Here are Mobius’s predictions for some of the potential winners from a trade war:

To contact the reporters on this story: Lilian Karunungan in Singapore at lkarunungan@bloomberg.net;Jasmine Ng in Singapore at jng299@bloomberg.net;Abhishek Vishnoi in Singapore at avishnoi4@bloomberg.net

To contact the editors responsible for this story: Tomoko Yamazaki at tyamazaki@bloomberg.net, Andrew Janes, Cormac Mullen

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