EMs to provide refuge from global turmoil: Mark Mobius

Mark Mobius of Franklin Templeton Investments believes that it is game over for Greece and the eurozone if policymakers and the European Central Bank don’t take any action before the Greek elections in June. “We have already seen a general exit of deposits from Greek banks and that could be accelerating if it continues at this rate,” he said in an interview to CNBC-TV18.

He says there is a fear of bank running in the periphery which needs attention, and that restoring confidence is key to stabilising global markets.

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In view of the turmoil in developed markets, Mobius sees emerging markets as a refuge for investors because of their stronger foreign exchange position, their lower debt to GDP levels and high growth levels.

On the positive note, Mobius says he doesn’t expect the global newsflow to worsen from hereon. “I think a lot of bad news is already in the markets, so there is a good chance of a healthier equity situation,” he said.

Below is an edited transcript of his itnervie with Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video.

Q: If you read between the lines of what global leaders have talked about over the weekend, then it’s not a foregone conclusion that Greece will exit the eurozone. What have you made of the comments and what would your assessment be of the way forward now?

A: I think now we are in a situation where the markets will begin to takeover and it would be very difficult for the policy makers to change the trend of events unless they act very quickly and very forcibly. We have already seen the exit of money from the Greek banks and that could spread to other parts of Europe where the economies are weaker, where the debts are high. So I think this is something that requires pretty urgent attention on part of the European leaders.

In the past, I thought that it was very unlikely that Greece would exit the euro. But now, with the trend of events taking place the way they are, we could see a general exit from banks and that would lead to Greece leaving the euro.

Q: Do you think policy makers will wait to see the election results of June 17 in Greece or are you expecting some policy action between now and then from the ECB or from any of the European politicians?

A: If they don’t act before the next election results, then the game is over because we are in a situation now where the markets are beginning to takeover and beginning to asses the risk of keeping money in Greek banks. So we have already seen a general exit of deposits from Greek banks and that could be accelerating if it continues at this rate.

Q: There is a meeting that will be held in Brussels this week and there are many issues that have been proposed over there. Do you think all these tools are just stop gap arrangements and inevitably it will lead to an exit of Greece from the eurozone and a spill over effect on the other peripheral economies?

A: Everything is stop gap in view of what has happened right from the very beginning. The fact that banks have been allowed to get rescue from the bad decisions they made regarding these loans and the debts that have been pilled up in their own books. So it’s been stop gap all the way.

This includes the US by the way with QE1, QE2 and so forth and so on. So it’s just a matter where confidence has to be restored, that’s the key.

Q: How are you and global investors approaching emerging market investing now, particularly countries like India which have not done very well after the first initial rally that we saw in January and February?

A: In view of the turmoil, emerging markets, including India, look pretty good because of their stronger foreign exchange position, their lower debt to GDP levels and high growth levels. So in some ways, emerging markets are quickly becoming a sort of a refuge.

Q: So for the rest of the year, do you think that we have set a base for ourselves in terms of the sell off or do you think the general trend is downwards and hedge funds are reducing their exposure towards emerging markets?

A: If there is general panic in Europe which spreads, then all markets are in trouble, then you will see everything heading down temporarily like we saw during the subprime crisis. This ofcourse opens up all kinds of opportunities for those people who have cash ready to put to work. So I would say it all depends on how this pans out in terms of the developments and what the market reaction is.

Q: Do you see the crisis deepening through the summer and do you think we may have seen the highs for the stock market for the year?

A: I don’t think its going to get any worse, I think a lot of bad news is already in the markets, so there is a good chance of a healthier equity situation.

You must remember that with fixed income, with the rates being so low, the risk is pretty high. If rates begin to climb up, then people holding lower rate bonds are going to be in trouble. So I believe that there is going to be a shift into equities and ofcourse that is good for emerging market equities as well.