Mark Mobius Warns Of 20% Fall In Chinese Stocks Amid Massive Rally

Mark Mobius, photo courtesy of Templeton Asset Management

Mark Mobius, the Executive Chairman of Templeton Emerging Markets Group who has over 40 years of experience investing in emerging markets, is warning investors that Chinese stocks have risen too fast after the world’s best stock market rally sent the benchmark gauge to its highest level in seven years, Bloomberg reports.

Mobius, who oversees $40 billion of investment, warns that a 20 percent fall in Chinese stocks is “very possible.”

The Shanghai Composite Index has nearly doubled in the past 12 months, the most among a total of 92 global benchmark measures which are tracked by Bloomberg.

“It has gone a little too far and too fast,” Mobius said.

Mobius says although the bull market in Chinese stocks is “intact,” he’s turning cautious in the short term after investors opened a record number of new stock accounts and increased margin debt to record highs.

Chinese investors opened a record 1.7 million accounts to trade equities in the week to March 27, while there is now more than 1 trillion yuan ($161 billion) of borrowed cash riding on the stock market.

In a margin trade, investors use their own money for just a portion of their stock purchase, borrowing the rest from a brokerage. The loans are backed by the investors’ equity holdings, meaning that they may be compelled to sell when prices fall to repay their debt.

“Too much credit is not a good thing in the long run,” Mobius said. “When the market turns, it could be a problem.”

The Templeton Executive Chairman also said that he believes that mainland Chinese shares, or A-shares, are unlikely to gain entry into the MSCI Inc. indexes this year, which will limit the demand from international investors.

Mobius says that he is avoiding buying mainland shares through the Hong Kong trading link due to “restrictive” rules on share ownership.

“According to Chinese regulations, the titles pass to the custodians in China and our custodian banks refuse to allow that,” Mobius said. “That’s a problem. I don’t see how this can be resolved. The Shanghai connect won’t work unless they revise regulations to allow foreign custodians to keep possession.”

Foreign funds sold a net 2.2 billion yuan ($460 million) of mainland equities through the Hong Kong trading link on Wednesday, which is poised for the most on record.