Since he "un-retired" from investing in March with plans to launch a bond fund to invest in emerging and frontier markets, former Franklin Templeton fund manager Mark Mobius has adopted one of the most bearish outlooks on Wall Street. And in keeping with his downcast views, Mobius warned in an interview with Bloomberg yesterday that the burgeoning trade war between the US and China is just beginning - and for investors, the worst is yet to come.
While the US and China will suffer a degree of economic blowback from their aggressive trade-war tit-for-tat, emerging-market economies will quickly see the worst of the collateral damage, as Mobius expects the MSCI Emerging Markets Index will fall another 10% from current levels by year's end. Such a drop would send the index into bear-market territory, as it is already down 16% so far this year. Meanwhile, the MSCI EM Currency Index is already down 6% on the year.
Companies based in emerging market economies will be hard hit by tightening liquidity as the Federal Reserve and European Central Bank normalize monetary policy, sending the dollar higher and squeezing firms that have come to depend on cheap debt financing. Global trade is already experiencing a sharp slowdown, which will have a disproportionate impact on emerging-market economies.
Thanks to the already-tight labor-market conditions in the US, Trump likely won't suffer much political blowback from his trade policies - and is therefore unlikely to capitulate - as rising US wages will likely offset the inflationary impact of higher prices on consumer goods, Mobius said.
"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," Mobius said during 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."
But while many emerging-market economies will suffer from higher borrowing costs, a stronger dollar and a decline in global trade, some also stand to benefit. For example, Mobius said, farmers in Brazil and Argentina could benefit as China searches for new soybean producers to replace its sources in the US.
"Trump is not going to give in and is going to continue to hit at China over the incredible trade imbalance...I believe it'll be a real problem with China going forward. The good news is some emerging-market economies will benefit from this. For example...soybeans...Argentina could benefit though they're struggling with a drought. You're going to see the winners and losers coming out particularly in the emerging-markets arena."
But since free trade has been an economic default for so long, the fact that we're entering "uncharted waters" will likely stoke a bout of risk aversion that will make life difficult for investors in emerging and developed markets. Back in April, Mobius warned that the US market is on the verge of a 30% collapse that will wipe out the equity market's gains from the past two years.
"We're in uncharted waters. The previous American administrations pretty much endorsed freedom of trade, the WTO and these multilateral agreements. Trump is going in the opposite direction...he's really upsetting the apple cart...therefore the uncertainty will grow not just in the US but in emerging markets as well.
But once the dust has settled, shrewd investors will find unprecedented opportunities, particularly in emerging markets - the focus of Mobius's recently launched EM bond fund.
Over the next year or two, Mobius said he'll be scanning for opportunities to become a buyer as EM assets slide: "We'll need to focus on individual countries and individual companies to see where the winners and losers will be. But it will be an interesting time in the next year or two years."
Watch the full interview below: