• The recent stock sell-off could be a warning signal of what is coming for the economy, said Mark Mobius.
• In an interview with The Economic Times, the billionaire and investor pointed out the danger of a recession.
• Mobius said it was a good time for investors to keep about 20 percent of their portfolio in cash.

This week’s sharp sell-off in the stock market was not an isolated incident. The recent decline could be a sign of more trouble ahead for the economy, says billionaire investor Mark Mobius.

The CEO of Mobius Capital Partners pointed to the crash in global stocks on Monday, with the S&P 500 recording its worst one-day loss in two years after surprisingly weak economic data in the US and the Bank of Japan raised interest rates, increasing selling pressure among investors.

Some commentators have argued that the sell-off was a healthy decline in U.S. stocks, given lofty valuations. But it is more likely that the crash was caused by deeper problems in the economy and political climate, Mobius said in an interview with The Economic Times on Thursday.

“It wasn’t technical in nature,” Mobius said of Monday’s sell-off, citing rising geopolitical tensions around the world as well as the upcoming U.S. presidential election. “All of that combined creates a lot of uncertainty. And then the situation in Japan set off a chain reaction, and of course the U.S. market crashed.”

Stocks could go even lower, Mobius said. The unwinding of carry trades – which emerged this week as the cause of the sell-off – probably has more room to go, he predicted, agreeing with other Wall Street strategists.

Meanwhile, the economy looks set to face “more problems ahead.” Recession fears increased this week after the labor market weakened more than expected in July.

There are also warnings of an economic slowdown regarding the money supply, which the Fed has “drastically” reduced in recent years in its attempt to reduce inflation, Mobius added.

“We are now feeling the impact of that reduction. If you look at the money supply growth in America, it is now very low,” he said. “That means there is not a lot of money flowing into the market, into businesses or into the economy. So that is a real problem and a long-term problem for the future. We have more problems in the US and that will affect the global situation if the money supply is not increased much more than it is now.”

It could be a good time for investors to hold on to more cash, Mobius said. Stock market disruptions are usually the signal “before the real economic impact becomes apparent,” he added.

“I think it’s a good idea to keep maybe 20 percent of your portfolio in cash, maybe a little more, because opportunities will arise in the future and it’s a good idea to have some reserves, let’s put it that way,” he said.

Stock prices have stabilized this week after Monday’s sharp drop, and sentiment on Wall Street remains broadly optimistic given solid economic growth and ambitious expectations for a Fed rate cut.

A full-blown bear market is unlikely, said Bank of America, as there are no technical signals in the market that suggest stock prices are peaking.