With the likelihood of the Fed’s QE2 becoming a reality, many investors and financial institutions are looking to invest more cash in equities abroad. Emerging Markets are growing very popular now. However there are other opportunities abroad to be had. Although looking for solid returns, one should take into consideration, the effect that this flood of foreign investment will have on emerging economies.
First of all, ‘ international currency rates ‘ are still a ‘ hot button ‘ issue for many countries around the globe. Many of these emerging economies are taking steps to deal with this inevitable tidal wave of foreign investment by taking measures to protect their currencies and economies from possible short-term consequences. Some countries are debating the idea of taxing foreign investment. I am sure there are other measures being debated as well.
Let’s face it. Emerging from these tough economic times, many if not most countries would like to devalue their currency if practical and /or possible to increase their export markets and balance of trade. The reality is that there does need to be some international consensus on global currency valuations. Second of all, many emerging economies and frontier markets are not in a realistic position to alter their international currency policy, without causing some serious problems to their economy.
It is not that these emerging economies don’t want or appreciate an influx of foreign investment. They are just somewhat hesitant regarding the effects ( some foreseen and many unforeseen ) of a short-term ‘ tidal wave ‘ of foreign investment in regards to their economies and economic policies.
I would make an educated guess that this coming tidal wave in emerging economies may possibly form some asset bubbles and some unforeseen negative consequences in the short to medium term. Not to be misunderstood, I believe that over the short to medium term, Frontier Markets will outperform Emerging Markets with very minimal additional risk involved. I think what we will see is that foreign investment funds will trickle ( or flow heavily ) to other pre-emerging ” frontier markets.” These are considered to be countries with stable economies, medium to large amounts of natural resources, good short to medium term projected Gross Domestic Product numbers, and stable monetary systems ( mainly small domestic debt to GDP projected ratios .)
Why this scenario possible and even likely? I will further discuss these issues in Part 2 of this post.
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