State of EMs – All about those [central] banks
By Mark Mobius, Executive Chairman, Templeton Emerging Markets Group
Emerging markets outlook
This year, you might title the theme song of the global markets: “All About Those [Central] Banks,” as monetary policy divergences have kept investors on alert and has heightened market volatility. A secondary theme might be “All About Those [Oil] Barrels” as market watchers ponder the potential impact of a prolonged slump in oil prices on various economies or a pickup in prices.
While performance in individual markets has varied, emerging markets in general outpaced developed markets in the first four months of this year, as it appeared that the US Federal Reserve (Fed) was not in a rush to raise interest rates and the impact of lower oil prices was seen as generally positive for the largest emerging market economies, China and India. Lower oil prices have also helped spur reform efforts in some emerging markets, including the removal of subsidies.
The markets are anticipating the Fed will begin raising interest rates sometime later this year but the majority of other global central banks remain in an easing mode, including the People’s Bank of China, Bank of Japan and the European Central Bank via massive quantitative easing (QE) programmes.
Certainly, reviving inflation and economic growth in Europe through QE is a topic du jour among European investors. However, from my perspective, banks are just not lending enough (as you can see in the eurozone loan-to-deposit ratio chart below), and people are not spending enough. In my view, there is money still waiting to be invested around the globe, money which could continue to fuel global equity markets—even as the Fed is expected to start to raise interest rates in the United States.
No rush for rate hikes
It’s our view that a lot of the modern technological tools we have readily embraced (mobile phone apps, e-commerce sites, etc.) have increased competition and pricing pressure, keeping inflation at bay in many areas of the economy. It’s difficult for a central bank (for example the US Fed) to justify raising interest rates when economic growth is not overheating, and there is no sign of inflation.
I can’t predict when the Fed will start raising rates, but it seems likely the US central bank isn’t in a rush to act in an aggressive manner, and any rate increases will likely be gradual and measured. Without a major inflationary threat, I don’t think the Fed would want the US dollar to get too strong, as it could negatively impact export-oriented companies—something we’ve already seen evidence of during the latest US corporate earnings season. Nonetheless, the markets will likely react when the Fed does act, so we are remaining cautious, and planning for some volatility ahead.
Moving into the second quarter of 2015 and beyond, we believe a complex global background appears broadly favorable for emerging markets. Developed markets offer a contrast between the solid growth trends seen in the United States, and the ongoing efforts in both Europe and Japan to animate sluggish economies through aggressive QE and depreciating currencies.