Mobius says that market volatility is a reality of modern markets, but believes that the misuse of derivatives is contributing to a level of volatility that is likely to remain elevated.
Acknowledging that derivatives have a valuable role to play as a hedging tool, Mobius says his main concern centres on the kind of practices that contributed to the crisis of 2008: the use of derivatives as speculative tools or those that involve high levels of leverage.
“When we have many derivative instruments betting in different directions with a lack of understanding and regulation, we are likely to have more volatility.
“Add to that the unforeseen and unpredictable events that occur across the world, together with an even more interconnected global marketplace, and we are likely to have more sharp and sudden moves in the market as knee-jerk reactions become more common among many investors”.
Mobius says it is “a pity” that excessive levels of volatility has the ability to scare investors away from equities, given the evidence for the outperformance of the asset class over the longer term.
He believes policymakers’ efforts to produce “a global regulatory standard” is heartening, but says a second crisis cannot be ruled out until a verifiable long-term solution is found.
An interview with Mark Mobius will appear in the July edition of Portfolio Adviser.
