Not too long ago, the European Central Bank (ECB), to fight the economic slowdown in the eurozone, lowered its benchmark interest rates. The hope with this move was the same as it was in the U.S., England, Japan, or other countries that are facing economic scrutiny: lowering interest rates will eventually increase lending and eventually bring in economic growth. In addition to this, the ECB also announced that it will be taking part in an asset purchase program—something similar to what was implemented by the Federal Reserve.
When I look at all this, it creates a very interesting situation. The ECB is lowering its interest rates as the Federal Reserve and others, like the Bank of England, are building grounds to raise their benchmark interest rates.
For example, the Bank of England is hinting at raising interest rates by spring of 2015. The governor of the central bank, Mark Carney, recently said that if interest rates were to rise in the spring as the markets expect, this move would allow the bank to meet its mandate regarding inflation and jobs creation, according to its forecasts. Simply put, the bank is prepared to raise interest rates early next year. (Source: Hannon, P., “Bank of England Gov. Mark Carney Signals Spring Rate Rise,” The Wall Street Journal web site, September 9, 2014.)
And the Federal Reserve may do the very same.
With this in mind, I question where the next big trade is going to be.
Remember what happened during the financial crisis, when the Federal Reserve and other central banks lowered their interest rates? In search of yields, the easy money … Read More
Emerging markets seem to be gaining popularity these days when it comes to the “next big thing” for investors. The reason for this is very simple: emerging market equities have come down in value significantly from their recent highs, leaving investors asking if its time to jump in and buy to profit.
Take a look at the equity market in India, for example—the country is considered one of the biggest emerging markets. The India Bombay Stock Exchange 30 Sensex Index is down more than 10% from its peak in late July.
India isn’t alone; stocks and key stock indices in other emerging market economies are in very similar conditions, if not performing worse. China’s stock market is lagging, Indonesia’s has recently plummeted, and the Brazilian equity market continues to show dismal returns.Please look at the chart below to get a more precise idea:
Chart courtesy of www.StockCharts.com
Before adding companies involved in emerging markets or buying an exchange-traded fund (ETF) that gives them exposure to those economies, every investor should ask themselves: does the stock market declining in value really mean there’s value—or, in other words, an opportunity for profit?
The answer: not necessarily.
Investors should consider that emerging market economies are sometimes relied on by developed nations to buy their products, because they can make them at cheaper rates. So if the developed markets start to see some sort of economic slowdown, the emerging market economies could see ripple effects. This may just be one of the phenomena driving the stock markets in those countries lower.
The developed nations in the global economy aren’t showing robust growth. For example, … Read More