Contrarian Mark Mobius Sees a 30% Stock Plunge

Noted investment manager Mark Mobius predicted the start of the long bull market in 2009, but now he's cautioning investors to brace for a steep selloff. In an interview with the London-based Financial News, as reprinted by MarketWatch, Mobius said: "I can see a 30% drop. When consumer confidence is at an all time high, as it is in the U.S., that is not a good sign. The market looks to me to be waiting for a trigger that will cause it to tumble. You can’t predict what that event might be—perhaps a natural disaster or war with North Korea." Mobius also warns that the growing popularity of ETFs and algorithmic trading pose huge risks to the market.

Mark Mobius is best known for his long association, from 1987 to 2018, with the Templeton Funds, later the Franklin Templeton Funds, as a pioneering emerging markets fund manager and later also as an executive. This year he left to form his own firm. Mobius was hired in 1987 by the even more legendary Sir John Templeton, noted as an advocate of patient, long-term, contrarian investing grounded in fundamental analysis.

'Snowball Effect'

ETFs account for almost half the trading in U.S. stocks, the Financial News notes. As Mobius told the FN: "ETFs represent so much of the market that they would make matters worse once markets start to tumble." As other observers have noted, when panicked investors liquidate their holdings of passive ETFs, the upshot is that a wave of selling hits every stock in a market sector, or perhaps every stock in a broad index such as the S&P 500 Index (SPX). Each downtick in prices then is likely to set off yet another wave of selling.

Computerized trading programs also concern Mobius, given that they can create massive selling pressures within the blink of an eye. He said this to the FN: "You have computers and algorithms working 24/7 and that would basically create a snowball effect. There is no safety valve to prevent further falls, and that fall would escalate very quickly." (For more, see also: How Algo Trading Is Worsening Stock Market Routs.)

Default, Recession, and 40% Plunges

While the MarketWatch headline says that Mobius is predicting a 30% correction, a drop of 20% or more is the commonly accepted definition of a bear market. Scott Minerd, global chief investment officer of Guggenheim Investment Partners, sees a wave of corporate debt defaults as interest rates rise, sending stock prices hurtling downward by 40%. Daniel Pinto, co-chief operating officer of JPMorgan Chase & Co., also has predicted a 40% market plunge. (For more, see also: Stocks On 'Collision Course With Disaster,' Face 40% Drop.)

Meanwhile, there are indications that an inverted yield curve, with short-term interest rates higher than long-term rates, may be forming, and that typically is a sure-fire sign of a looming recession, as financial columnist Mark Hulbert writes in MarketWatch. Recessions, in turn, typically induce bear market conditions, though bear markets often start before recessions, as Hulbert notes.

Nicolas Colas of DataTrek Research has outlined three likely scenarios for the next big market decline. Money manager and so-called "prophet of doom" John Hussman sees a brutal 60% stock market nosedive ahead, followed by years of zero or negative returns. Other noted investors, such as Warren Buffett and Ray Dalio, have offered advice on what investors should do. (For more, see also: How to Plan for a Bear Market.)

More About Mobius

Mobius' biggest claim to fame is the closed-end Templeton Emerging Markets Fund (EMF), in which an initial investment of $100,000 in 1989 would have grown to $3.3 million over the next 28 years, according to ValueWalk. However, fund manager evaluation service Trustnet Ltd. concludes, looking at all funds managed by Mobius since 2000: "Overall, performing about the same as the peer group composite. Nevertheless, over a long track record, the manager has outperformed the peer group more often than not." Trustnet finds that Mobius has tended to outperform peers in up markets, but underperform in down markets.