A new economic crisis will develop from the failure to effectively regulate derivatives and the extra global liquidity from stimulus spending, Templeton Asset Management Ltd.’s Mark Mobius said.
“Political pressure from investment banks and all the people that make money in derivatives” may prevent adequate regulation, said Mobius, who oversees $25 billion as executive chairman of Templeton in Singapore. “Definitely we’re going to have another crisis coming down,” he said in a phone interview from Istanbul on July 13.
Derivatives contributed to almost $1.5 trillion in writedowns and losses at the world’s biggest banks, brokers and insurers since 2007, in accordance with data compiled by Bloomberg. Global share markets lost almost half their value this past year, shedding $28.7 trillion as investors became risk averse amid a worldwide recession.
The U.S. Justice Department is investigating the market for credit-default swaps, Markit Group Ltd., the information provider majority-owned by Wall Street’s largest banks, said July 13.
Mobius didn’t explain what he thought was needed for effective regulation of derivatives, that are contracts utilized to hedge against changes in stocks, bonds, currencies, commodities, interest rates and weather. The Bank for International Settlements estimates outstanding derivatives total $592 trillion, about Ten times global gross domestic product.
“Banks make so much money with these things that they don’t want transparency because the spreads are so generous when there’s no transparency,” sad Mobius
A “very bad” crisis may emerge within 5 to 7 years as stimulus money contributes to financial volatility, Mobius said. Governments have pledged about $2 trillion in stimulus spending.
The Justice Department’s antitrust division sent civil investigative notices this month to banks that own London-based Markit to ascertain if they have unfair access to price information, according to three people familiar with the situation.
U.K. banks will be forced to curb trading activity that helped cause the global financial crisis, Britain’s top financial regulator said recently, while stopping short of planning to separate their lending and securities units.
“Banks have lobbied hard against any changes that would make them unable to take the kind of risks they took some time ago,” said Venkatraman Anantha-Nageswaran, global chief investment officer at Bank Julius Baer & Co. in Singapore. “Regulators are not winning the battle yet and I’m not sure if they are making a strong case yet for such changes.”
Mobius also predicted several short, “dramatic” corrections in stock markets for the short term, saying that “a 15 to 20 percent correction is nothing when individuals are nervous.”
Emerging-market stocks “aren’t expensive” and will keep increasing, Mobius said. He said he favors commodities and companies such as London-based Anglo American Plc, that has interests in platinum, gold, diamonds, coal and base metals.
In India and China, Mobius sees value in consumer-oriented stocks and banks, he said.