While she did recognize in her comments that the global economy is interlinked with U.S. fortunes, she made it clear that the U.S. economy is the Fed's primary mandate. And, she said that she doesn't believe that global issues pose a substantial risk to the U.S. economy though she stated the Fed is "monitoring" the situation closely.
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The net impact of her comments on emerging markets is that the current crisis remains intact regarding asset flows from developing economies.
If the Fed intends to continue tapering its bond buying (ultimately leading at some point to higher interest rates despite the 10-year Treasury lately dropping to 2.7 percent), this means that asset flows will continue to move out of emerging markets toward higher-yielding assets and economies that provide better visibility in terms of economic stability.
Turkey's recent interest-rate increases reflects the problems emerging markets are facing. Emerging markets make sense when the risk taken provides returns commensurate with that capital risk. Given that emerging markets have so dismally underperformed established markets over the last several years, and given that interest rates are likely rising over the long-term, emerging markets will now need to demonstrate that they can exist on a level playing field (not as a relative alternative to damaged established economies).
How does this impact investors perspectives?
Very simply, investors will demand consistency and momentum in earnings and GDP growth and that is something sorely lacking in the emerging market economies. Investors must also recognize that because of the clear statements by Yellen that the Fed will maintain a low-interest policy well past a 6.5-percent unemployment rate, this will likely have an effect on emerging market investment and timing.
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The continuation of an easy money policy could very well further spur GDP growth (albeit on an artificial basis in the U.S. and euro zone) and will continue to make these equity markets appealing to investors. This will likely exacerbate, or at least continue at the same pace, the outflow from emerging markets.
Remember that the exception to this rule are frontier markets that, because of restrictions related to capital inflows, are now not seeing many outflows out of these economies. In fact, the challenge for investors is finding a way to invest in countries like Myanmar with any kind of scale given the restrictions against foreign ownership.
These are the assets that still provide opportunities in the emerging-market space. Also remember that export-related economies tend to be subject to more volatility as their fortunes are directly tied to global GDP as well as currency fluctuation. For that reason, focus on assets that serve the internal needs of emerging economies.
I moderated a panel for a small group of CEOs on China when I was at the World Economic Forum in Tienjin, China, a year and a half ago, and that was made abundantly clear by those participating in the forum. Their recommendation to investors? Buy internal consumption not exports; that's where investor should be focused.
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We are moving to a more normalized interest-rate policy on the long-term and investor should recognize that, while there still problems in established economies, the dark days appear to be fading. Emerging economies provide investment opportunities but only for those that have the sufficiently long time horizon and the stomach for extreme volatility.
Don't abandon emerging markets but make sure your expectations are reasonable and recognize that excess volatility relative to other capital markets are part of the game you play. And make emerging markets a small part of your overall strategy. Despite a long-term optimistic view, remember it can take decades in some cases for an investment thesis to play out and most investors simply do not have that patience nor fortitude.