The United States is one of the most influential countries in the global economy. Emerging markets like Brazil, India, Russia, and others depend on the United States for a thriving economy. But this can be a problem when the U.S. isn’t doing as well as it should be, and right now, some of the problems in the U.S. are threatening to wreak havoc on emerging markets.
Tapering the Stimulus
In May, the Federal Reserve Board announced it may soon decide to taper its $85 billion in bond buying. Just the mere mention of the possible tapering sent emerging markets wild. Stocks plummeted, currency values decreased, and the countries tried hard to protect their investors.
Four month later, following a highly anticipated meeting, the Fed announced it would hold off for a while on tapering. It decided the U.S. economy was not quite strong enough to withstand the force of losing the Fed’s money. Again, emerging markets went crazy – but this time they rebounded.
If the Fed decides to taper its stimulus package, interest rates will rise over time. This means it will cost more to borrow, which could be highly detrimental to emerging markets that are trying to grow and require U.S. investments to do so.
It’s the emerging markets’ dependency on the U.S. that’s the problem. China doesn’t have anything to worry about because it depends on its own money flows. But India, Turkey, Brazil, and Russia depend on cash flow from the United States.
And if the possible taper in the near future weren’t bad enough, the government shutdown is posing a problem too. A recent poll showed that each week the government is shut down, there’s a 0.1 percent decline in growth. With economies in emerging countries already suffering, any decline, no matter how small, will be significant, especially if the government shutdown lasts weeks and the nation defaults on its bills. In fact, some predict a default could cause a recession that will turn into a depression.
A Strong U.S. Economy Hurts Markets Too
Even though there are some wrenches in the U.S. economy right now, it’s doing much better overall. The housing market is improving, vehicles sales are up, and the joblessness rate is staying close to the same or declining from week to week. But this may not be good news for emerging markets either.
America is changing, and it’s trying to be more independent. According to Bloomberg, several banks forecast that America will start to focus more on domestic resources in the next few years, which means it won’t have to turn to emerging countries. This could be devastating, as the U.S. is a major importer of many overseas products.
In addition, the United States could end up as competitor to these countries. With more manufacturing, it may be able to sell its products for less, which means other countries will have to compete by reducing their prices.
If you put all of this together with the upcoming Fed tapering, the stinted growth because of the government shutdown and risk for default, and America’s increase in domestic energy and manufacturing, it’s not looking good for emerging markets.
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How to Prepare
It’s evident America is changing, and that means your investments should change as well. As Morgan Stanley (NYSE: MS) and Citigroup Inc. (NYSE: C) told Bloomberg, investors should turn to the dollar. Recovery will continue and borrowing costs will rise, so investing in the dollar makes sense.
Selling emerging-market currencies may also be a good idea, as they will start to decline as the dollar rises in value and emerging countries begin to feel the effects of the changing America.
From the New York Times:
“Let me be blunt: The universe of attractive opportunities is shrinking,” said Mr. [Lewis] Kaufman [of the Thornburg Developing World fund]… While pockets of strong growth can still be found in emerging markets, “the problem is the good stuff is increasingly carved out — and expensive.”
Emerging market investing isn’t the best solution right now. The changing America is making it increasingly difficult for these nations to grow and thrive the way they once were. Keep your eyes on the Fed, the government shutdown, and the improving economy. These things will show you where the dollar is headed and why you should invest in it.
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