What about EMs during a recessionary period?
🎧💡 #5 Macro & Business Insights
Hi all, and welcome back to The Macro & Business Insights!
My research will cover the follow points:
Where we are in terms of business cycle and how this may be critical investing decision making
Why EMs are important, and which are the five propositions for keeping them in mind
How International Finance Corporation emerging market indices (IFCG) performed during the two major Federal Reserve tightening cycles, in 1988 and 1994
What is the relationship between US federal funds rate and emerging stocks
Only if we master the business cycles, we can have a clear overview of the economy and understand where we are going on.
You’re with me if I tell you that when you have the knowledge to facilitate your work in the investing process that you’ll get a simplification about it.
Sure, it won’t be easy to do it, but you’ll get more statistics to your side.
We also have to know that in the world an important part of the world economy regards the Emerging Markets, so is important to understand these markets and how we could take the best opportunities there.
We’re witnessing a tightening cycle nowadays, so I’ve made a research how EMs have performed during the most bigger tightening cycles by the FED, in 1988 and 1994.
And if there is each relationship between US federal funds rate and emerging stocks.
The business cycle reflects the aggregate fluctuations of economic activity, which can be a critical determinant of asset performance over the intermediate term.
The performance of economically sensitive assets such as stocks tends to be the strongest when growth is rising at an accelerating rate during the early cycle, then moderates through the other phases until returns generally decline during recessions.
Defensive assets such as investment-grade bonds and cash-like short-term debt have experienced the opposite pattern, with their highest returns during a recession and the weakest relative performance during the early cycle.
Emerging markets have become too large and too important for global equity and credit investors to ignore.
The case for investing in emerging markets rests on five key propositions
1. Emerging countries can grow faster than developed markets, provided that they adopt market-oriented policies.
2. Countries will increasingly adopt market-oriented policies in the current world environment.
3. Companies in fast growing emerging markets will be able to generate matching profit growth.
4. Emerging markets have acceptable risks.
5. Emerging markets have relatively low correlations with major countries.
There appears to be no simple relationship between emerging market performance and US money supply growth. Real money supply growth fell dramatically after 1986, yet emerging markets performed well.
There does not appear to be a simple relationship between the US federal funds rate and emerging stocks, either.
The two major Federal Reserve tightening cycles, in 1988 and 1994, saw buoyant emerging markets.
However, a recession in the US or other industrial countries is not necessarily a major negative for emerging markets. Asian stocks did extremely well in the early 1990’s despite Japan and Europe being in recession.
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Disclosure
This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. This material has been prepared for informational purposes only. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.