EM Guru Mark Mobius changes outlook, says EM outflows will continue

Emerging market fund manager Franklin Templeton’s Mark Mobius predicts that the outflows on emerging markets will continue.

From Bloomberg:

The worst isn’t over for emerging markets after the benchmark stock index sank to a five-month low and the nations’ currencies tumbled, said Templeton Emerging Markets Group’s Mark Mobius.

“The negative sentiment is pretty much in place so you can expect a lot more selling,” Mobius, 77, who oversees more than $50 billion in developing-nation assets as an executive chairman at Templeton, said in an interview from Rio de Janeiro today. “We are looking but actually not buying at this stage. Prices can come down or take time to stabilize.”

The same article notes that in an interview last January 29 Mr. Mobius predicted that “inflows into developing nations would resume later this year because they have fast economic growth, low debt relative to gross domestic product and high foreign-exchange reserves.”

This seems consistent with his 2014 forecast at the start of the year where he wrote at his Franklin Templeton blog:

As long-term fundamental investors, we do not make short-term predictions for share prices, but we believe longer-term developments that look likely to gain traction in 2014 could drive solid growth potential in many emerging economies.

Pardon me, but based on the above accounts, I interpret Mr. Mobius’ most recent stance as a drastic U-turn.

Has he come to the realization that the standard sloganeering of “fast economic growth, low debt relative to gross domestic product and high foreign-exchange reserves” barely serve as effective antidotes to the current selloff? Or has he come to realize that the supposed advantage of EM are really defective metrics which is why there has been sustained outflows?

Yet it’s odd for people who love to chatter about “long term” seem to fail to understand that “Long term is a product of accumulated short term activities”. This is best epitomized by a popular aphorism from Chinese philosopher Laozi’s “Journey of a thousand miles begins with a single step”. 

Long term outcomes are hardly ever linear. They are dependent on the course of people’s present actions.

Take for instance if Mr. Mobius’ epiphany is correct and outflows continue, what happens if these outflows would lead many EMs to suffer a crisis?  

What will be the respective reactions by each of the affected government of EM nations?

Will they apply more political actions as therapy? Will they resort to capital controls? Will they ballout affected sectors? How will they finance these? By indulging in massive monetary inflation or by raising taxes steeply or (updated to add) by deposit bail-in haircuts? Will protectionism rear its ugly head?

Or will they apply less political actions? What if some governments resort to the following unpopular measures such as allow banks to fail, allow debt defaults, reduce taxes, and or undertake market economy reforms? 

The conflicting actions above will have different impacts to the economic environment for each EM nation. Which of the two environment would be bullish post-crisis?

The point is, to repeat, the long horizon strictly depends on accrued short term actions of society such that an overhaul of the present template of activities will lead to vastly different long term outcomes. 

This also means that "outflows" have not been anomalies or reflective of investor irrationality (as popularly alleged) but instead a manifestation of the evolving dramatic changes in 'fundamentals' in response to earlier easy money conditions. 

"Outflows" are essentially symptoms of the boom-bust cycle.