Dubai Crisis Means ‘Correction’ to Mobius, Risk Aversion to Das

VNStockNews.com - Dubai’s attempt to reschedule debt may spur a “correction” in emerging markets, according to Mark Mobius, while the global slump in equities shows government spending alone won’t protect financial markets, Arnab Das of Roubini Global Economics said.

Mobius, who oversees about $25 billion of developing-nation assets as chairman of Templeton Asset Management Ltd., said a 20 percent drop for shares is “quite possible.” Stock volatility and risk aversion may jump as countries and companies default on loans, according to Das, the head of market research and strategy at RGE, the advisory firm founded by Nouriel Roubini.

Stocks retreated for a second day today, government bonds jumped and credit-default swaps climbed after Dubai World, the government investment company burdened by $59 billion of liabilities, sought to delay repayment of debt. The MSCI Emerging Markets Index has slumped 4.7 percent in the past two days after more than doubling from its 2009 low in March.

“This may be the trigger to allow for the market to take a rest and pull back,” Mobius said in a Bloomberg Television interview by phone from Hanoi. “I felt that there would be a significant correction in what is an ongoing bull market,” he said. “If Dubai has to default, that could start a wave of defaults in other areas.”

MSCI’s gauge of emerging nations has advanced 65 percent this year, more than double the gain in developed markets, as a rally in commodities buoyed stocks from Brazil to Russia and economists estimated that China was the only economy of the world’s 10 largest to expand in 2009.

Credit Markets

The MSCI World Index of 23 developed countries has added 25 percent this year, rebounding from its biggest annual decline on record as the Federal Reserve spent, lent or guaranteed $11.6 trillion and held interest rates near zero to unlock credit markets and end the first simultaneous recessions in the U.S., Europe and Japan since World War II.

Dubai, which borrowed $80 billion in a four-year construction boom to transform its economy into a tourism and financial hub, suffered the world’s steepest property slump in the recession. Home prices fell 50 percent from their 2008 peak, according to Frankfurt-based Deutsche Bank AG.

“We’re bound to see a rise in risk aversion,” Das, who is based in London, said in an interview yesterday. “The Dubai situation signifies that although the major central banks around the world have stabilized the financial system, they can’t make all the excesses simply disappear. We still have to work out those balance-sheet stresses. The recovery is proceeding, but significant challenges still lie ahead.”

Roubini’s Calls

Das, the former head of emerging-markets strategy at Dresdner Kleinwort, joined RGE last month to lead a team that advises on allocations in stocks, bonds, interest-rate products, commodities and currencies in developed and emerging markets.

Roubini, an economics professor at New York University and chairman of RGE, predicted the financial crisis that spurred $1.7 trillion in credit losses and asset writedowns at global financial companies. Banks have raised $1.5 trillion since 2007 to combat the credit crisis, data compiled by Bloomberg show.

“In some countries and sectors, debtors will be able to get by because government intervention has made it easier for them to refinance,” said Das. “In other places, excessively leveraged debtors, who always get access to too much credit during a boom, cannot roll over their debt and will default.”

‘Dead-Cat Bounce’

Roubini’s 2006 warning about the financial crisis helped shield clients from the worst slump in global equities since at least 1988. He said in March that the stock rally that began that month was a “dead-cat bounce” and that it may “fizzle” in May. The MSCI World has rallied 66 percent since March 9, and the Standard & Poor’s 500 Index has climbed 64 percent in the steepest rally since the Great Depression.

Futures on the S&P 500 tumbled 2.9 percent at 11:29 a.m. in London today after U.S. markets were closed for the Thanksgiving holiday yesterday.

Emerging-market stocks were today’s biggest losers. South Korea’s Kospi index fell 4.7 percent, the steepest drop since January. Samsung Engineering Co. tumbled 9.8 percent, leading declines among construction stocks on concern orders may slow in the United Arab Emirates, South Korean builders’ biggest overseas market.

The MSCI Emerging Markets Index dropped 2.7 percent, the most in a month. The gauge has still surged 105 percent since Oct. 27, 2008.

‘Not Unusual’

“A 20 percent correction is not unusual in such a bull market, so that’s quite possible and we should be ready for that,” Mobius said. “There’s no way that anyone can specifically predict exactly when and to what extent, but certainly there will be corrections along the way.”

The retreat in emerging markets may be compounded by Vietnam’s currency devaluation and an “avalanche” of initial share sales, Mobius said.

The State Bank of Vietnam devalued its currency this week and raised interest rates to combat inflation and narrow the trade deficit. Vietnam’s benchmark stock gauge plunged 12 percent this week, the most since the period ended 0ctober 2008. The VN Index rose 1.7 percent today, the first gain since Nov. 19. Mobius said he’s “bullish on Vietnam, but over the short and medium term we have to look very carefully at what’s happening.”

Volatility Gauge

Europe’s Dow Jones Stoxx 600 Index was down 0.4 percent after falling as much as 1.8 percent to extend yesterday’s 3.3 percent tumble, the biggest plunge since April. The VStoxx Index, which gauges the cost of using options to protect against declines in the Euro Stoxx 50, climbed 2.7 percent to 31.17 after surging 28 percent yesterday, the biggest gain in a year.

The VIX Index, which measures the cost of using options as insurance against declines in the S&P 500 over the next month, has dropped 49 percent this year. It surged last November to a record 80.86, a level almost four times higher than its average over its two-decade history.

The so-called correlation coefficient that measures how closely markets rise and fall together reached the highest level ever in June, with the S&P 500 and benchmark measures for raw materials, developing-country equities and hedge funds rallying in tandem, according to data compiled by Bloomberg. Oil has jumped 66 percent this year and the Reuters/Jefferies CRB Index of 19 raw materials climbed 21 percent.

“All this should magnify differentiation between riskier and less risky asset classes and names, after a couple of quarters in which correlations have risen sharply as market participants put on risk pretty much across the board,” Das said. “That will make it harder to make money simply by riding the liquidity wave from central banks. People are going to have to start focusing even more on the fundamentals.” (Bloomberg)