“We could have an optimistic scenario for quite some time,” Mobius, who oversees about $34 billion, said in a telephone interview from Beijing yesterday. “Commodities are the big area for us. We are great believers in higher commodity prices and therefore are investing in commodity companies.”
The MSCI World Index yesterday surged to a two-year high, gold jumped to a record and crude oil advanced to a seven-month high after the Fed announced Nov. 3 plans for $600 billion in bond purchases through next June. Asian stocks rose today, pushing a benchmark gauge to its best weekly advance this year, on speculation the Fed will succeed in stoking growth in the world’s biggest economy.
The liquidity flooding the global economy from the Fed’s quantitative easing will extend record gains for commodities and dollar depreciation cannot be avoided, said Mobius, 74, who is also the chairman of Templeton’s emerging markets group.
The U.S. economy is growing and that will have a positive effect on Europe and spread to other countries, Mobius said. The “bright spot” is the emerging markets where demand continues to grow, he said. Rising incomes in developing nations are especially good for consumer stocks, he said.
Mobius joins Goldman Sachs Asset Management’s Jim O’Neill in saying the Fed’s measures to boost the U.S. economy will spur further gains for global equities. O’Neill, creator of the BRICs acronym to describe the large emerging markets of Brazil, Russia, India and China, said this week that while a new “bull market” in global equities probably started in the past 15 months, current valuations are far from a “bubble.”
The MSCI Emerging Markets Index has jumped 17 percent this year, compared with an 8.4 percent advance for a measure of developed markets.
Mobius said he’s “very bullish” on China as the country has “no big problems.” Even though stock valuations are not as attractive as last year they are “not out of sight” and Templeton funds are buying companies that are expanding in the nation’s less developed regions, particularly consumer companies.
“It’s not as easy as it was but we’re still buying and finding opportunities,” he said.
The Shanghai Composite Index has rebounded 32 percent since reaching this year’s low on July 5 on expectations central banks around the world will inject more cash into their economies to boost growth. It remains down 4.5 percent this year after the government raised bank reserve requirements and curbed lending growth to cool the economy.
Demand is so strong in China that Mobius is now looking at airline stocks, an industry that he said he normally “wouldn’t touch” because of low profit margins.
Emerging markets may faces inflationary pressure from the capital inflows spurred by the Fed’s measures, he said.
Inflows into emerging-market stock funds have surpassed $60 billion and exceeded $46 billion in bond funds, both poised for their best year since Cambridge, Massachusetts-based EPFR Global started tracking them in 1995.
Central banks in emerging markets will buy dollars to prevent their currencies from rising too fast and as their foreign exchange reserves increase in size so they will appear increasingly safe to investors looking for markets with higher economic growth and yields, Mobius said.
“It’s a vicious cycle,” he said. “The consequences could be not too good going forward. It’s something we have to watch carefully.”
The Fed needs to explain this week’s decision to purchase bonds to pump money into the world’s biggest economy or risk undermining the global recovery, Cui Tiankai, China’s Vice Foreign Minister, said at a press briefing in Beijing today.
Cui’s remarks echo concerns raised across Asia as countries brace themselves for stronger currencies and possible asset- price inflation. German Finance Minister Wolfgang Schaeuble yesterday said the U.S. was creating problems for the world and the subject would be raised during next week’s Group of 20 leaders’ summit in Seoul.
For now, capital inflows in emerging markets are being counterbalanced by “hundreds of billions” of funds being raised by new stock sales and secondary fund raisings, Mobius said.
If funds keep pouring in and companies that have raised cash begin using it to buy assets, prices will be pushed up in a “snowball effect,” he said.
The worst-case outcome is a bubble that bursts after prices rise too fast, with “people getting hurt” because they were too optimistic, Mobius said.
If the U.S. government’s quantitative easing plan fails and fiscal tightening follows, Western economies may be back into recession, Albert Edwards, Societe General SA’s London-based strategist, wrote in a report yesterday. That will trigger a 60 percent drop in equity prices, he said.
Mobius said none of these outcomes is likely in the short term and his funds are fully invested. “I’m pretty optimistic,” he said. “I don’t see any risks any time soon. These things can last for years and years.”