Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Gold/SPX Ratio and the Gold Stock Case - 18th Jan 21
More Stock Market Speculative Signs, Energy Rebound, Commodities Breakout - 18th Jan 21
Higher Yields Hit Gold Price, But for How Long? - 18th Jan 21
Some Basic Facts About Forex Trading - 18th Jan 21
Custom Build PC 2021 - Ryzen 5950x, RTX 3080, 64gb DDR4 Specs - Scan Computers 3SX Order Day 11 - 17th Jan 21
UK Car MOT Covid-19 Lockdown Extension 2021 - 17th Jan 21
Why Nvidia Is My “Slam Dunk” Stock Investment for the Decade - 16th Jan 21
Three Financial Markets Price Drivers in a Globalized World - 16th Jan 21
Sheffield Turns Coronavirus Tide, Covid-19 Infections Half Rest of England, implies Fast Pandemic Recovery - 16th Jan 21
Covid and Democrat Blue Wave Beats Gold - 15th Jan 21
On Regime Change, Reputations, the Markets, and Gold and Silver - 15th Jan 21
US Coronavirus Pandemic Final Catastrophe 2021 - 15th Jan 21
The World’s Next Great Onshore Oil Discovery Could Be Here - 15th Jan 21
UK Coronavirus Final Pandemic Catastrophe 2021 - 14th Jan 21
Here's Why Blind Contrarianism Investing Failed in 2020 - 14th Jan 21
US Yield Curve Relentlessly Steepens, Whilst Gold Price Builds a Handle - 14th Jan 21
NEW UK MOT Extensions or has my Car Plate Been Cloned? - 14th Jan 21
How to Save Money While Decorating Your First House - 14th Jan 21
Car Number Plate Cloned Detective Work - PY16 JXV - 14th Jan 21
Big Oil Missed This, Now It Could Be Worth Billions - 14th Jan 21
Are you a Forex trader who needs a bank account? We have the solution! - 14th Jan 21
Finetero Review – Accurate and Efficient Stock Trading Services? - 14th Jan 21
Gold Price Big Picture Trend Forecast 2021 - 13th Jan 21
Are Covid Lockdowns Bullish or Bearish for Stocks? FTSE 100 in Focus - 13th Jan 21
CONgress "Insurrection" Is Just the Latest False Flag Event from the Globalists - 13th Jan 21
Reflation Trade Heating Up - 13th Jan 21
The Most Important Oil Find Of The Next Decade Could Be Here - 13th Jan 21
Work From Home £10,000 Office Tour – Workspace + Desk Setup 2021 Top Tips - 12th Jan 21
Collect a Bitcoin Dividend Without Owning the King of Cryptos - 12th Jan 21
The BAN Hotlist trade setups show incredible success at the start of 2021, learn how you can too! - 12th Jan 21
Stocks, Bitcoin, Gold – How Much Are They Worth? - 12th Jan 21
SPX Short-term Top Imminent - 12th Jan 21
Is This The Most Exciting Oil Play Of 2021? - 12th Jan 21
Why 2021 Will Be the Year Self-Driving Cars Go Mainstream - 11th Jan 21
Gold Began 2021 With a Bang, Only to Plunge - 11th Jan 21
How to Test Your GPU Temperatures - Running Too Hot - GTX 1650 - Overclockers UK - 11th Jan 21
Life Lesson - The Early Bird Catches the Worm - 11th Jan 21
Precious Metals rally early in 2021 - 11th Jan 21
The Most Exciting Oil Stock For 2021 - 11th Jan 21
Financial Market Forecasts 2021: Navigation in Uncharted Waters - 10th Jan 21
An Urgent Message to All Conservatives, Right-Wingers and Patriots - 10th Jan 21
Despite Signs to the Contrary, Gold Price at or Near Top - 10th Jan 21 -
Ultimate Guide On The 6 Basic Types Of Index Funds - 10th Jan 21
Getting Vaccinated at TESCO - Covid-19 Vaccinations at UK Supermarket Pharmacies and Chemists - 10th Jan 21
Cheers for the 2021 Stock Market and These "Great Expectations" - 9th Jan 21
How to Plan Your Child With Better Education - 9th Jan 21
How To Find The Best Casino - 9th Jan 21
Gold Is Still a Bargain Buy - 8th Jan 20
Gold Price Set to Soar as Hyperinflation Looms - 8th Jan 21
Have Big Dreams? Here's How to Pay for Them - 8th Jan 21
Will the Fed Support Gold Prices in 2021? - 8th Jan 21
Stocks trading strategies for beginners - 8th Jan 21
Who is Buying and Selling Stocks in 2021 - 8th Jan 21
Clap for NHS Heroes 2021 as Incompetent Government Loses Control of Virus Again! - 8th Jan 21

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

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