Best of the Week
Most Popular
1. 2019 From A Fourth Turning Perspective - James_Quinn
2.Beware the Young Stocks Bear Market! - Zeal_LLC
3.Safe Havens are Surging. What this Means for Stocks 2019 - Troy_Bombardia
4.Most Popular Financial Markets Analysis of 2018 - Trump and BrExit Chaos Dominate - Nadeem_Walayat
5.January 2019 Financial Markets Analysis and Forecasts - Nadeem_Walayat
6.Silver Price Trend Analysis 2019 - Nadeem_Walayat
7.Why 90% of Traders Lose - Nadeem_Walayat
8.What to do With Your Money in a Stocks Bear Market - Stephen_McBride
9.Stock Market What to Expect in the First 3~5 Months of 2019 - Chris_Vermeulen
10.China, Global Economy has Tipped over: The Surging Dollar and the Rallying Yen - FXCOT
Last 7 days
Stock Market VIX Volaility Analysis - 19th Mar 19
FREE Access to Stock and Finanacial Markets Trading Analysis Worth $1229! - 19th Mar 19
US Stock Markets Price Anomaly Setup Continues - 19th Mar 19
Gold Price Confirmation of the Warning - 18th Mar 19
Split Stock Market Warning - 18th Mar 19
Stock Market Trend Analysis 2019 - Video - 18th Mar 19
Best Precious Metals Investment and Trades for 2019 - 18th Mar 19
Hurdles for Gold Stocks - 18th Mar 19
Pento: Coming QE & Low Rates Will Be ‘Rocket Fuel for Gold’ - 18th Mar 19
"This is for Tommy Robinson" Shouts Knife Wielding White Supremacist Terrorist in London - 18th Mar 19
This Is How You Create the Biggest Credit Bubble in History - 17th Mar 19
Crude Oil Bulls - For Whom the Bell Tolls - 17th Mar 19
Gold Mining Stocks Fundamentals - 17th Mar 19
Why Buy a Land Rover - Range Rover vs Huge Tree Branch Falling on its Roof - 17th Mar 19
UKIP Urged to Change Name to BNP 2.0 So BrExit Party Can Fight a 2nd EU Referendum - 17th Mar 19
Tommy Robinson Looks Set to Become New UKIP Leader - 16th Mar 19
Gold Final Warning: Here Are the Stunning Implications of Plunging Gold Price - 16th Mar 19
Towards the End of a Stocks Bull Market, Short term Timing Becomes Difficult - 16th Mar 19
UKIP Brexit Facebook Groups Reveling in the New Zealand Terror Attacks Blaming Muslim Victims - 16th Mar 19
Gold – US Dollar vs US Dollar Index - 16th Mar 19
Islamophobic Hate Preachers Tommy Robinson and Katie Hopkins have Killed UKIP and Brexit - 16th Mar 19
Countdown to The Precious Metals Gold and Silver Breakout Rally - 15th Mar 19
Shale Oil Splutters: Brent on Track for $70 Target $100 in 2020 - 15th Mar 19
Setting up a Business Just Got Easier - 15th Mar 19
Stock Market Elliott Wave Analysis Trend Forercast - Video - 15th Mar 19
Gold Warning - Here Are the Stunning Implications of Plunging Gold Price - Part 1 - 15th Mar 19
UK Weather SHOCK - Trees Dropping Branches onto Cars in Stormy Winds - Sheffield - 15th Mar 19
Best Time to Trade Forex - 15th Mar 19
Why the Green New Deal Will Send Uranium Price Through the Roof - 14th Mar 19
S&P 500's New Medium-Term High, but Will Stock Market Uptrend Continue? - 14th Mar 19
US Conservatism - 14th Mar 19
Gold in the Age of High-speed Electronic Trading - 14th Mar 19
Britain's Demographic Time Bomb Has Gone Off! - 14th Mar 19
Why Walmart Will Crush Amazon - 14th Mar 19
2019 Economic Predictions - 14th Mar 19
Tax Avoidance Bills Sent to Thousands of Workers - 14th Mar 19
The Exponential Stocks Bull Market Explained - Video - 13th Mar 19
TSP Recession Indicator - Criss-Cross, Flip-Flop and Remembering 1966 - 13th Mar 19
Stock Investors Beware The Signs Of Recession / Deflation - 13th Mar 19
Is the Stock Market Still in a Bear Market? - 13th Mar 19
Stock Market Trend Analysis 2019 - 13th Mar 19
Gold Up-to-Date' COT Report: A Maddening Déjà Vu - 12th Mar 19
Save Fintech? Ban Short Selling. It's Not That Simple - 12th Mar 19
Palladium Blowup Could Expose Scam of Gold & Silver Futures - 12th Mar 19
Next Recession: Concentrating Future Losses & Bringing Them Forward In Time As Profits - 12th Mar 19
The Shift of the Philippine Peso Regime - 12th Mar 19
Theresa May BrExit Back Stab Deal Counting Down to Resignation, Tory Leadership Election - 12th Mar 19
Phase 1 of Stock Market Correction - 11th Mar 19
Long Awaited Stock Market Pullback has Finally Arrived - 11th Mar 19
US Presidential Cycle and the Stock Market - Video - 11th Mar 19
Stock Market Elliott Wave Analysis Trend Forercast - 11th Mar 19
Chinese Economic Data Shakes the Global Stock Markets - 11th Mar 19
The Fed Is Playing a Dangerous Game - 11th Mar 19
The Stock Market Has Called the Fed’s Bluff, What’s Next? - 11th Mar 19
Turkey Holiday Bazaar Extreme Jewelry Price Haggling - Fethiye Market - 11th Mar 19

Market Oracle FREE Newsletter

Stock and Finanacial Markets Trading Analysis Worth

Is U.S. Fed Responsible for Emerging Markets Crisis?

Stock-Markets / Emerging Markets Jan 29, 2014 - 02:14 PM GMT

By: Axel_Merk

Stock-Markets

From the bully pulpits in São Paulo to the blogosphere in cyberspace, the Fed is blamed for the turmoil in Emerging Markets (EM). That’s a bit like blaming McDonald’s for obesity. Blaming others won’t fix the problems in EM economies, it won’t fix investors’ portfolios and it is an unlikely way to lose weight. Investors and policy makers need to wake up and realize that they are in charge of their own destiny. Let us explain:


The Blame Game

Talking to politicians around the world, they have a few things in common. One of them is that it’s always somebody else’s fault. However, few tears should be shed for countries that have missed the opportunity to take advantage of the good years to engage in structural reforms to make their economies (and, as a result, their markets) more resilient against the whims of the Federal Reserve. While some EM countries made great strides in developing a more mature regulatory environment, in encouraging competition in the banking sector, of developing domestic and offshore fixed income markets, others limited their efforts to imposing taxes on hot money flooding their markets. That money wouldn’t have needed to be so hot, if there had been a cool place to invest in. But if sovereign debt markets are the only game in town, don’t be surprised if that’s where the money flows. Last August we explained in more depth why the weaker emerging markets are rather vulnerable. Today, we’ll stay at a higher level, focusing on how we think these dynamics may play out.

Investors chasing yield

First of all, we have no sympathy for investors being caught in the turmoil. Before the flight out of emerging markets, we saw yield chasing investors embrace what appeared to be a free lunch, notably buying local debt in these markets. It was great: the yields were relatively high, while tightly managed currencies provided the illusion of low risk plus upside potential. When “risk was on,” floods of money poured into these markets. A beauty about exchange-traded funds is that they can provide access to otherwise illiquid markets. Except that these products can then trade at a premium, as more money flows into these markets than the local fixed income markets could readily absorb. It didn’t take a rocket scientist to suggest that if a bunch of investors headed for the exit at the same time, it might get rough. Our suggestion to consider reducing hidden interest rate risk by focusing on more established EM and cash instruments rather than chasing yield in longer-term bonds fell on deaf ears. One very large investment shop we talked to put it succinctly: “we have a strategic allocation to EM local debt” – I guess their “strategy” was to run for the hills at the first sign of trouble.

And no, these investors are not learning their lessons. They are wired to live on the edge, in the erroneous belief they can jump ship before a bubble bursts. Of course, that rarely works. This time around, these yield-chasing investors didn’t take a break. Rather than hiding in the perceived safe haven called the US dollar, they went straight into the peripheral Eurozone. There’s relative calm there; after all, European Central Bank (ECB) President Draghi has promised to do “whatever it takes.” As those that follow us know, we are far more positive on the euro than many others are. However, that doesn’t mean we think investors get rewarded for the risks they are taking on buying debt in some of the weaker European countries. Not satisfied with fixed income returns, another round of investors then came to push up the equity markets. There’s some good news in this: it’s far healthier for risk-friendly capital to chase yields than it is for tier 1 capital of banks to be exposed to such securities. As a result, when the next crisis flares up in the Eurozone, odds are much better that “contagion” is limited. Differently said, a crisis in the Eurozone may no longer be a crisis for the euro. But I digress.

Is the EM crisis a buying opportunity?

Because liquidity in EM markets is lower, they tend to be most vulnerable when volatility spikes. A key source of the volatility is, in our assessment, the Federal Reserve. We believe Fed policy may be volatile for the following reasons: our highly levered economy might over-react to any real tightening should we get it; the Fed doesn’t really know how to get the economy back to normal (incoming Fed Chair Janet Yellen suggested monetary policy will revert back to normal once the economy is back to normal; that’s an oxymoron because we can’t have a normal economy in a monetary environment that prevents risk from being priced properly); and because we don’t think we can afford positive real interest rates (good luck financing government debt at rates that historically would have been perceived as normal). In our assessment, there are plenty of opportunities for more violent reactions in EM as a result of what the Fed might be up to.

As indicated, this doesn’t equate to us blaming the Fed for the woes of EM, because policy makers in EM need to embrace reality and get their economies ready for what may be turbulent times ahead. That’s another spoiler alert: this global financial crisis may be far from over, as we still have too much debt in the world. And if there’s one thing we are reasonably sure of, it is that we don’t think policy makers will give up trying to kick the can down the road. We see Brazil and South Africa among the most vulnerable. Turkey is subject to self-inflicted dynamics and proof that the markets are ultimately stronger than politicians. To get on a steady course and regain market confidence, structural reform, not kneejerk reactions by central bankers or politicians is needed.

Investors looking for buying opportunities may want to look at the more advanced Asian economies or India. Although India is one of the weaker EM countries, the new leadership at the Reserve Bank of India has started to introduce some real reforms; additionally, a new government in the springtime might follow-through with important reforms. Having said that, India does not have a good track record in actually implementing reform. And it’s still a weak country, so India may well be drawn downward in any EM turmoil. But India might bounce back more and, over time, become more resilient. Still, investors must be aware that this is not for the faint of heart. We prefer taking the currency risk over embracing interest rate, credit or equity risk.

Similarly, when we talk about opportunities in established EM, we are thinking China. China certainly has its share of challenges, but many of their reforms are in the right direction. We don’t think a bursting housing bubble in China is as detrimental as many predict because only a small portion of buyers take out loans to buy an apartment. We also think that a transition to a more domestically driven economy may happen much faster than many anticipate, if only for the push of the government to encourage competition in the banking system; that’s because small and medium size enterprises (SMEs) have had to go to loan sharks as they have historically had a difficult time qualifying for the government set cost of credit that state owned enterprises (SOEs) have access to. With more competition, credit might actually get priced according to the risk profile of borrowers, which could lead to a major entrepreneurial boost. However, it may be a rocky road, as the bailout of some investment schemes suggests: fostering a too big to fail attitude is poisonous for sound capital allocation. But even the naysayers for China should be aware that, a bit like the U.S., China is a big fish in a small pond and may be perceived as a regional safe haven.

To learn more, please register to be notified when we hold a webinar. Also don’t miss another Merk Insight by signing up for our newsletter.

Axel Merk

Manager of the Merk Hard, Asian and Absolute Return Currency Funds, www.merkfunds.com

Rick Reece is a Financial Analyst at Merk Investments and a member of the portfolio management

Axel Merk, President & CIO of Merk Investments, LLC, is an expert on hard money, macro trends and international investing. He is considered an authority on currencies. Axel Merk wrote the book on Sustainable Wealth; order your copy today.

The Merk Absolute Return Currency Fund seeks to generate positive absolute returns by investing in currencies. The Fund is a pure-play on currencies, aiming to profit regardless of the direction of the U.S. dollar or traditional asset classes.

The Merk Asian Currency Fund seeks to profit from a rise in Asian currencies versus the U.S. dollar. The Fund typically invests in a basket of Asian currencies that may include, but are not limited to, the currencies of China, Hong Kong, Japan, India, Indonesia, Malaysia, the Philippines, Singapore, South Korea, Taiwan and Thailand.

The Merk Hard Currency Fund seeks to profit from a rise in hard currencies versus the U.S. dollar. Hard currencies are currencies backed by sound monetary policy; sound monetary policy focuses on price stability.

The Funds may be appropriate for you if you are pursuing a long-term goal with a currency component to your portfolio; are willing to tolerate the risks associated with investments in foreign currencies; or are looking for a way to potentially mitigate downside risk in or profit from a secular bear market. For more information on the Funds and to download a prospectus, please visit www.merkfunds.com.

Investors should consider the investment objectives, risks and charges and expenses of the Merk Funds carefully before investing. This and other information is in the prospectus, a copy of which may be obtained by visiting the Funds' website at www.merkfunds.com or calling 866-MERK FUND. Please read the prospectus carefully before you invest.

The Funds primarily invest in foreign currencies and as such, changes in currency exchange rates will affect the value of what the Funds own and the price of the Funds' shares. Investing in foreign instruments bears a greater risk than investing in domestic instruments for reasons such as volatility of currency exchange rates and, in some cases, limited geographic focus, political and economic instability, and relatively illiquid markets. The Funds are subject to interest rate risk which is the risk that debt securities in the Funds' portfolio will decline in value because of increases in market interest rates. The Funds may also invest in derivative securities which can be volatile and involve various types and degrees of risk. As a non-diversified fund, the Merk Hard Currency Fund will be subject to more investment risk and potential for volatility than a diversified fund because its portfolio may, at times, focus on a limited number of issuers. For a more complete discussion of these and other Fund risks please refer to the Funds' prospectuses.

This report was prepared by Merk Investments LLC, and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward-looking statements expressed are subject to change without notice. This information does not constitute investment advice. Foreside Fund Services, LLC, distributor.

Axel Merk Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules