Financial markets were remarkably calm last
week.
Many stock markets in the United States,
Europe, and Asia moved higher as investors chose to focus their attention on
the minutes of the October 27-28, 2015 Federal Open Market Committee (FOMC) meeting,
which were released on Wednesday, rather than recent terrorist attacks in
Paris, Lebanon, Mali, and against Russia.
The FOMC minutes captured attention because
they suggested even if the Federal Reserve does begin to tighten monetary
policy in December, rate increases may be incremental and the target rate may
not be as high as many imagined. Bloomberg
reported:
“Fed officials received a staff briefing on
the equilibrium real interest rate, or the policy rate that would keep the
economy running at full employment with stable prices, according to the
minutes. Fed officials discussed the possibility that the short-run equilibrium
rate “would likely remain below levels that were normal during previous
business cycle expansions,” the minutes said.”
Former Federal Reserve Chairman Ben Bernanke
has written about the equilibrium real interest rate on his blog. The point he
makes is the equilibrium rate – not the Fed – determines interest rates. The
Fed uses its influence to move interest rates toward levels that are consistent
with its estimate of the equilibrium rate. If the Fed pushes for rates that are
too high, the economy may slow. If it pushes for rates that are too low, the
economy may overheat. Not everyone agrees on this point, and that has led to
debate between Mr. Bernanke and Former Treasury Secretary Lawrence Summers.
While the Fed is expected to begin tightening
U.S. monetary policy, the European Central Bank (ECB) is expected to further
loosen monetary policy in December. The
Wall Street Journal reported the ECB is “prepared to deploy its full range
of stimulus measures to fight low inflation…” The news was welcome. CNBC reported European markets closed the
week at three-month highs.
if there were a “Page Six” for finance and economics,
emerging markets would
be splashed across it.
Remember the
saying, “Buy low and sell high?” Well, emerging markets have not performed well
for quite a long time, and that has a lot of people speculating about what may
happen in the next few years.
Analysts at BlackRock opined, “Emerging-market (EM)
equities are fighting an uphill battle, held back by an appreciating U.S. dollar,
falling commodity prices, and flagging exports. These only add to their other
medium-term struggles, such as dwindling corporate profits, declining
productivity, and a dispirited investor base. With valuations of EM equities
trading at the largest discount to their developed-market peers in 12 years,
some opportunities are beginning to emerge.”
In fact, several
economists and asset managers have begun to compare and contrast the attributes
of various emerging markets. Some say China is a better bet than Latin America.
Others like the opportunities in Southeast Asia. A Goldman Sachs analyst cited by Bloomberg
cautioned, “…Colombia, South Africa, Turkey, and Malaysia still need to tackle
their current-account imbalances; Russia, India, and Poland are among nations
that have improved enough for their assets to rally…”
The point is
there is a buzz building around emerging markets. Sometimes, when analysts
begin to emphasize the potential of an asset class, investors are tempted to
pile in. While emerging markets investments can be a valuable part of a well allocated
and diversified portfolio, it’s a good idea to remember there are distinct
risks which are not suitable for all investors associated with investing in
emerging markets.
Weekly
Focus – Think About It
“All you need in this life is ignorance and
confidence, and then success is sure.”
--Mark Twain
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