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Shrewd Investors Can Profit From Emerging-Market Bloodbath

Shrewd Investors Can Profit From Emerging-Market Bloodbath

Wednesday, 13 June 2018 11:38 AM Current | Bio | Archive

Emerging Markets

Emerging markets that feasted on cheap money for almost a decade ago are now suffering from a withdrawal of global liquidity, in first instance by the Federal Reserve.

Countries that feasted on the cheap money that resulted from the quantitative easing and near-zero interest rates initiated by the Fed almost a decade ago are now suffering from a withdrawal of global liquidity.

For investors it’s important to keep in mind that the correction in emerging-market currencies, debt and equities “has further to go” with the Fed on track to continue raising interest rates for the foreseeable future, and as global trade tensions boost investor demand for currencies such as the dollar that are considered havens.

It’s also a fact that the Fed’s financial tightening cycle will run its course. No doubt about that.

Last week, Perry Warjiyo, the new governor of the Bank of Indonesia, complained that the Fed was considering only domestic U.S. objectives in setting policy rather than the impact of its measures on foreign economies.

Sorry for Mr. Warjiyo, but the Fed’s statutory objectives for monetary policy are maximum employment, stable prices, and moderate long-term interest rates.

For investors it’s also a fact that the correction in emerging markets is not a reason to avoid them. Rather, in following selected sovereign risk caution, investors could profit over the longer term by making intelligent country allocations at attractive valuations.

Fed Rate Hike

Today, it’s Federal Open Market Committee (FOMC) decision day and the consensus is the Fed to hike the target range by 25 basis points (bp) to 1.75 percent - 2.00 percent without making big changes to the "dot plot."

The Fed is set to recognize that the Fed funds rate is close to the longer-run dot by stating "monetary policy is modestly accommodative" (modestly being a new word), which is not a change in its monetary policy strategy.

A quarter point a quarter is what is expected from the Fed, and a quarter point a quarter is what should be delivered by the Fed.

The dollar spasmed over a Wall Street Journal report that Fed Chair Jerome Powell may hold a press conference after every Federal Open Market Committee (FOMC) meeting and the idea being this might imply a rate hike after every meeting does seem rather unlikely, at least to me.

Mr. Powell doesn’t want any change in the process to be misread as a signal of plans to raise rates more aggressively, for example, by foreshadowing rate increases at consecutive meetings.

Keep in mind what the Fed Chair said in March: “I would want to think very carefully about it and make sure that no one would take more frequent press conferences as a signal of the path of policy.”

The idea is more likely about the transparency of the Federal Reserve decision making and it would simply match the communication styles of other important central banks around the world.

It’s probably a bit too soon for markets to expect signals as to the tightening cycle to be expected in 2019. The fabled dot-plots are not really a rate signal and more direct communication seems unlikely when we are only halfway through the 2018 tightening process. The 2019 rate tightening cycle is however where markets fall further behind the Fed and the consensus economic view in terms of their expectations.


U.S. inflation, before seasonal adjustment, has picked up to 2.8 percent year-on-year, but it doesn’t need to be beaten back with a regular rate raising process.

We also got producer price inflation (PPI), which is important as a signal to financial markets of the extent of corporate pricing power and thus profits as well as a precursor of consumer price inflation.

U.S. producer prices increased more than expected in May, leading to the biggest annual gain in nearly 6-1/2 years, but underlying producer inflation remained moderate, Reuters reported.

The Labor Department said on Wednesday its producer price index for final demand rose 0.5 percent last month, boosted by a surge in gasoline prices and continued gains in the cost of services. The PPI edged up 0.1 percent in April.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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In following selected sovereign risk guidelines, investors could profit over the longer term by making intelligent emerging-market country allocations at attractive valuations.
fed, rate, hike, emerging, markets, investors, inflation
Wednesday, 13 June 2018 11:38 AM
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