Quantitative Easing Fueling Emerging Market Growth
January 10, 2011
Since the Federal Reserve's recent round of quantitative easing, developed and emerging market
investment opportunities are beginning to look more attractive to U.S and foreign investors.
In fact, the Fed's actions have prompted a small resurgence of confidence in economies
overseas.
U.S. investors have really been more attentive to what specific actions the U.S. central bank
is taking and less so on the consequences of the bank's decisions on the global economy and,
moreover, on investment portfolios.
With the second round of quantitative easing, or QE2, well on its way, the economic advantages
and investment opportunities have certainly tipped on the side of the emerging markets. So
here's how to play on this theme to reap some rewards.
But first, we must understand the overall shape and health of the U.S. economy. The U.S.
economy is in pretty bad shape more than it has been in some time. The primary economic
factors dragging the economy down are record level unemployment rates and poor consumer
consumption which have contributed to the overall slowdown in the U.S. GDP.
Another worrying concern is the steep decline of the U.S. dollar relative to other currencies
over the past year. Chine, for instance, is creating a Yuan-heavy currency basket to go
against the global reserve currency. If it gets some support from the emerging markets it can
avoid currency wars among its colleague markets, which, if works, would resemble a coalition
similar to the Organization of the Petroleum Exporting Countries, or OPEC. China’s attempt at
an organized effort can lead to that type of coalition among emerging market nations.
Let's take a look at what may unfold in the quarters to come if the dollar continues to
decline and no emerging market coalition forms. As interest rates overseas become more
attractive for investors, capital will flow to emerging markets more aggressively. As the
supply of new money increases, central banks in these emerging economies will apply various
tactics to control inflationary movements, just as the Federal Reserve would if the opposite
was true. As a result, those markets might enter into currency wars and trade issues.
Subsequently, the chaos and turmoil will spark investors’ fears and lead to capital outflows.
Needless to say, emerging markets have quite a road ahead of them.
For the time being, the state of the emerging market economies is clearly the opposite at the
moment. In fact, they are experiencing a strong bull market. Even though there have been some
pullbacks in the past couple of weeks in some global markets, many emerging markets are still
enjoying their accelerated growth, including markets such as Thailand and Turkey which are
among the strongest.
Think about some long-term ideas such as Petrobas and its oil fields off the coast of Brazil
which the world will demand. Or consider the airline and air travel industry with companies
such as Boeing and Airbus concentrating more on foreign markets.
While it's important to note that all the money entering emerging markets may experience a
strong bull market for some years to come, the joy ride can easily run out. Nevertheless, the
theme is to enjoy the growth of strong economies such as China, Brazil, and India in your
portfolios.
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