Central Bank to the World?
The emerging market sell-off in the last couple of weeks has sparked a debate as to whether the Fed should slow down or even pause their withdrawal from quantitative easing programs. Those looking for the fed to relax their stance were disappointed on Wednesday with the Fed announcing another cut back of $10 Billion bringing the monthly purchases down to $65 Billion.
Without question, the Fed taper has taken a toll on emerging markets but the Fed can’t act as Central Banker for the World. Yes, central banks often work in a coordinated fashion but there is little the Fed can do at this point to stem the capital flight from these markets. The last couple of days I’ve been concerned the Fed would take a breather. In an interview with TheStreet.com I said a pause this month would be a mistake and would prompt concern.
Wednesday’s release from the Fed refers to several data points they are monitoring in the U.S. economy but know where does it mention or even reference some of the carnage taking place overseas. The Fed understands that the current QE program has run its course and offers diminishing returns. They also realize at this point it offers little in terms of supporting the second half of their mandate to stimulate employment. The Fed has done their job. Any further improvement has got to come from pro-growth policies in Washington. Once again they reiterate their intention to keep rates close to zero for an extended period of time. This is of course only possible as long as inflation expectations remain subdued. I’ve penned often that inflation is unlikely to be an issue for us here until wage inflation shows signs of life.
SPX vs. EEM
Money continues to pour into emerging markets even though they have underperformed for a few years. The fact remains that many of these countries are not shareholder friendly. I’ll repeat what I said last week. As a portfolio manager I don’t care whether it’s accounting issues in China, scandals in Turkey or a Brazilian government that taps into corporate profitability as though it is an ATM machine. Until they get their act together I’ll remain underweighted.
Templeton chairman Mark Mobius is correct when he says, these countries are the future growth engines of the world. I agree with the following qualification. You have to differentiate. Investments in basket ETF’s like iShares MSCI Emerging Markets Indx (EEM) are a mistake. Perhaps more than any other, the emerging markets scream for active management. Not all emerging market economies are painted with the same brush. Active management can differentiate between the good bad and steer capital to where it will do the most good.