Emerging markets may have dodged a liquidity draining bullet with the U.S. Federal Reserve delaying its asset-purchase tapering plans, but the reprieve is only temporary according to Pimco's Ramin Toloui.
"Don't mistake this period of stability for the idea there are no problems and therefore there's no need for action," said Toloui, co-head of emerging markets portfolio management at Pimco, which has nearly $2 trillion under management.
"This postponement of tapering is an opportunity for emerging market countries to strengthen their economies during a period of stability rather than a period of volatility," he added.
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Over the May-to-September period, emerging market stocks and currencies convulsed after the Fed said it was considering tapering its $85-billion-a-month asset-purchase program. But markets stabilized after the Fed decided to keep its asset purchases steady at its September meeting and as economists pushed back their tapering expectations to 2014.
"The key thing to watch in emerging markets in coming months are which countries use any period of stability to strengthen their economies for the long term versus those that are inclined to take a victory lap and say that the volatility we experienced during the summer is over," Toloui said.
"It's still important to differentiate within the emerging market universe," he said.
He noted factors such as foreign-exchange reserves, international debt and current account deficits became "meaningful markers" for how different countries' financial assets performed over the May-to-September period.
"Another area of differentiation is the policy response of different countries to volatility and whether that policy response was a short-term ad hoc one or whether it was reflecting the importance of putting in place an environment for the long-term success of the economy."
Toloui sees Mexico as a positive example of an emerging market pursuing structural change, with the government embarking on fiscal and energy sector reforms.