QE2 could be a mixed bag for emerging markets investors.
In the short term, investors stand to benefit as a further $600 billion of quantitative easing announced Nov. 3 by the Federal Reserve will only increase flows into emerging markets equity and bond investments as developed-country investors pile into emerging markets in search of better returns and better economic fundamentals.
But some experts contend that those flows could overwhelm some emerging economies, leading to bumpy rides in terms of greater volatility that managers and institutional investors will need to navigate country by country.
“Behind closed doors, emerging market central bankers speak of the current flow of money as an avalanche,” said Cynthia Steer, managing director and chief research strategist at Rogerscasey Inc., Darien, Conn. “However, they remain unaware that, given asset allocation changes (by institutional investors) expected in 2011 and 2012, the flows may increase to a much larger extent than they envision today.”
Greater flows could further politicize economic and trade issues, as officials in emerging economies seek to stem inflows through currency intervention and capital control policies, experts said.
In a research note issued in October, Western Asset Management Co. said the latest round of quantitative easing “will only serve to exacerbate” flows into emerging markets. “As a consequence, and in the absence of a mutually agreed upon course of action by which to achieve global rebalancing, emerging markets policymakers will continue to erect unilateral barriers to capital and financial flows in an attempt to protect the competitive position of their trade sectors, and to insulate their economies from inflationary pressures,” according to the note.