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April 20, 2020, 4:42 p.m. EDT

Stock market could retest lows once investors see coronavirus toll on earnings, says Mark Mobius

Emerging-markets pioneer says ESG principles will return to spotlight as result of coronavirus crisis

By William Watts, MarketWatch

Mark Mobius

Mark Mobius, the emerging-markets investing pioneer, is confident the world economy will bounce back from the COVID-19 pandemic and offer investors a round of bargains—but sees the potential for another round of pain.

In an interview via a Zoom conference call from his hotel room in Durban, South Africa, where the co-founder of Mobius Capital Partners has been stuck for two weeks thanks to travel restrictions, Mobius said he suspects the stock market will see a W-shaped recovery. That means the rebound off the March lows will likely be followed by a retest of those levels before finally proceeding back to the previous highs and beyond.

That is in contrast with investors who have argued that the severe economic pain from lockdowns put in place to contain the pandemic will be short-lived and that the historic monetary and fiscal stimulus being pumped into economies around the world will foster a V-shaped bounce for both the global economy and equities.

Mobius said he thinks those factors will eventually set the stage for a “very bullish environment,” but that investors are unlikely to shrug off ugly economic news and earnings that will inevitably be seen in coming quarters.

“So what I’m saying is that a lot of the damage that’s being done to balance sheets, to sales, to profitability, etc., has not really been realized,” Mobius said. “In other words, the realization will come when the companies announce their earnings next year or the end of this year. I think as the news filters out, gradually, that people will have second thoughts.”

Over the long term, Mobius emphasized that he is “very optimistic” markets will bounce back after creating “incredible bargains.”

Dry powder

But it does make sense to keep some dry powder on hand in the event of a renewed correction that could see markets at least retest the March lows in coming months, he said.

Mobius said he has been making purchases for his own account and for the fund and that those investments have “made a little money” but that he’s keeping cash in reserve for a another correction that may come.

The S&P 500 (S&P:SPX)  rallied 15.5% over the past two weeks through Friday, its biggest such rise since 1974. The U.S. large-cap benchmark fell nearly 34% from its Feb. 19 closing high to its March 23 low. It is risen 28.5% from its nadir.

Stocks fell Monday, with the Dow Jones Industrial Average (DOW:DJIA)  ending nearly 600 points lower, down 2.4%, while the S&P 500 declined 1.8%

The MSCI Emerging Markets Index (MSCI:XX:891800) remains down more than 19% for the year to date, while the S&P 500 has trimmed its year-to-date loss to 11%.

It is a given that emerging markets will suffer even more severely when the U.S. and developed markets crash, Mobius said, with global investors quick to pull money out of EM assets as soon as the fear of a downturn appears.

Past lessons

But the good news, is that many emerging-market countries learned their lesson during the Asian financial crisis in the late 1990s, building up foreign-exchange reserves, he said.

Emerging markets were in focus as the coronavirus crisis took hold. The outbreak originated in China, which locked down much of its economy around the Lunar New Year and delivering the first contraction in gross domestic product (first-quarter GDP fell 6.8% year over year) since records began in 1992, and first spread to other Asian countries, including South Korea and Singapore.

Meanwhile, a global scramble for dollars, including by companies and banks in emerging-market countries, was seen amplifying volatility across financial assets and contributing to the March stock-market rout. The Federal Reserve responded by reactivating and enhancing dollar swap lines with major central banks and opening new swap lines with other central banks, including major emerging-market countries like Brazil and Mexico, while also establishing new repo facilities designed to slake the thirst for dollars.

That was credited with helping to tame a sharp rise in the dollar, that was seen bringing more pain to emerging-market countries by making it more expensive to service dollar-denominated debt and sucking cash out of their economies as investors flee to U.S. assets.

Mobius said efforts to provide needed liquidity, including stepped-up lending efforts by the World Bank, will help to steady the ship and provide an opportunity to address corruption and other issues.

Meanwhile, a plunge in oil prices was another devastating blow for oil-exporting emerging economies but a boon for oil importers. Crude plunged in March as economic shutdowns decimated demand and Russia and Saudi Arabia launched a price war that added to a flood of unneeded crude.

Despite an agreement on production cuts reached earlier this month, the rising tide of oil has seen crude weakness continue, with the front-month contract for the U.S. oil benchmark  making history with a plunge into negative territory on Monday.

Read: Why the oil market just crashed into negative territory — 4 things investors need to know

Oil winners and losers

For oil exporters like Nigeria, the collapse in crude prices is bad news, but “for the big importers—China, India, Turkey and a bunch of other emerging-market countries—the news is very good and, in fact, that is one of the bright spots,” Mobius said.

China looks set to recover quickly from the pandemic, he said, while India, now among the worst-hit countries, should present opportunities because countries that suffer the most in a downturn can provide the greatest opportunity over the longer term “assuming that we see the end of this by the end of this year.”

The post-COVID environment will also likely see a further move to consolidate supply chains within countries. He’s seen evidence of this in Brazil, where managers have told him that foreign-owned auto makers are moving to secure more locally made parts after suffering disruptions as a result of the pandemic. That is a shift that’s likely to permanent, but not necessarily a negative for emerging markets as a whole, he said.

ESG resurgence

Mobius Capital Partners, which he co-founded in 2018 after building his fame running emerging-markets investments at Franklin Templeton for more than three decades, is focused on investments that enhance environmental, social and governance, or ESG, standards. Mobius last year co-wrote book, “Investing for Good,” on ESG investing along with his Mobius Capital Partners co-founders Carlos von Hardenberg and Greg Konieczny.

The market crisis has put ESG somewhat “in the back seat,” with investors focused elsewhere, Mobius said. But that’s not likely to last.

“Once we get back more to normal, people are going to be asking: ‘Hey, why weren’t you prepared for something like this? Why didn’t you have the situation under control and then how did you take care of your staff and your customers?”, Mobius said.

Those questions will put the focus on the governance portion of ESG, while the environment component will also stand out since pollution leaves persons more vulnerable to respiratory ailments.

“I believe the whole environmental issue is going to come roaring back after we’ve solved these immediate problems,” Mobius said.

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