Lay Off the Fed
A prominent topic of discussion among market watchers and pundits has been US Federal Reserve Chairman Ben Bernanke’s presumed fear of raising interest rates. The theory is that Bernanke is reluctant to raise rates because it would hurt the Fed’s balance sheet. This is the latest in a series of anti-Fed, pseudo-hard money claims. Although theories like this are entertaining, they offer nothing to investors.
It’s true that the Federal Reserve chairmanship is partly a political position–indeed it was a purely political position for the last Fed chairman–and consequently any Fed chairman should be expected to come under fire due to the politics of the moment. But the last time we checked, the Fed’s dual mandate didn’t include turning a profit.
The Fed is many things, but it’s not a hedge fund and as such does not mark to market–no losses occur until a transaction is completed. Even if the Fed were to book a loss on its balance sheet, these losses would never truly be realized. That’s because the Fed can just rebate these losses back to the Treasury department.
Grim theories regarding the management of the US economy always make for a good read. But as we noted in the June 1, 2011, issue of the Global Investment Strategist, “Prepare the Rally Caps,” the challenges facing the US economy are long-term in nature and well-known to investors.
Furthermore, as we stated in the March 21, 2009, issue of Passport to Profits, “The End of America as We Know It, “the challenges facing the US economy are structural in nature and will affect the country’s rate of growth, standard of living and global economic leadership. In other words, these issues have nothing to do with a “relapse” and/or debt levels, debt ceilings, or the Fed’s balance sheet.”
In regards to the emerging markets, investors have surely noticed that these markets have struggled to stay in positive territory this year. Not only have investors booked profits after these markets rallied from their 2009 lows, economies in developing countries have faced significant headwinds in 2011.
Emerging markets have suffered from an uncertain US economic recovery, high inflation, rising commodity prices and government measures intended to slow economic growth in developing countries. But these challenges do not alter our investment case for emerging markets, where increased urbanization, domestic consumption and new infrastructure will fuel growth for the foreseeable future. Furthermore, valuations in emerging markets remain reasonable; the MSCI Emerging Markets Index trades at 10.4 times forward earnings, a significant discount to its long-term average of 13.6. Consequently, any weakness in emerging markets should be viewed as a buying opportunity.
We maintain our forecast that emerging markets, particularly those in Asia, will outperform developed markets this year. Emerging markets should experience double-digit growth at the end of the summer and through the rest of the year. Don’t follow the herd. The best time to invest is when others are fearful or merely unwilling to come to grips with powerful investment trends.
For more about investing in emerging markets, visit us at the Global Investment Strategist…