Money management superstar Mark Mobius thinks the Federal Reserve will cut the federal funds rate to 1 percent as foreclosures mount, and that the dollar will soon stabilize.
Mobius, who oversees $47 billion in emerging market stocks as executive chairman of Templeton Asset Management, also expects Chinese stocks to resume their ascent. The Shanghai exchange has shed half its value since last year.
He told Bloomberg that continued woes in the housing market and fears in the credit markets will push the Fed to ease further.
"I was looking at 1 percent a few months back, and I still adhere to that,” Mobius says.
"I don’t think the fear is over. I think you’ll see more bad news on foreclosures, so there will be a lot of political pressure to lower rates.”
Since September, the Fed has sliced the fed funds rate by 325 basis points to 2 percent. Many experts took the Fed’s statement accompanying its latest rate cut as an indication that the central bank will stop its rate reductions for now.
Despite his forecast of further easing, Mobius doesn’t expect the dollar to fall much further. It already has lost more than 7 percent against the euro and yen this year.
"The dollar is completely bombed out when you look at its value, particularly against Asian currencies,” he says.
"So I think we’re probably at the end of the dollar devaluation.”
Most emerging market currencies, particularly those in Eastern Europe, have overshot fair value against the dollar, Mobius says. But he maintains that the Chinese yuan and Indian rupee remain undervalued against the greenback.
The dollar has dropped more than 9 percent against the yuan over the past year and almost 2 percent against the rupee.
As for China’s willingness to let the yuan appreciate as far as it has, Mobius says, "They realized they had to make a change to satisfy the U.S. and their other trading partners in Europe. It also made sense to control inflation, because they import a lot of goods.”
Economic fundamentals, though, dictate another 5 percent rise for the yuan, he says.
"Then we’ve reached fair value, but often these things overshoot, so we could go a lot further. Still, the government is in control, so it won’t get too far out of hand,” Mobius said.
Mobius argues that China’s stock market is undervalued, but just the "H” shares that are traded in Hong Kong and overseas, not the "A” shares traded on the mainland.
"Some stocks are trading at 30 percent to 40 percent discounts,” he says. "There’s a lot of opportunity there. That’s why after Brazil, China is the biggest country in our funds.”
Mobius recommends commodity and consumer-related stocks.
"Those are the two areas where we are focusing,” he says. "We have to buy China Mobile and oil companies.”
He’s less bullish on financial stocks and industrials. "The financials are under restraints [from the government]. So they won’t be making the kind of money people expect, though they are fine for the long term.”
On the industrial front, Mobius recommends stocks only on a select basis.
"We’ve made money on machinery and machine tool companies, where there’s specialization and pricing power,” he says.
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