Posted by: Ravi Saraogi | December 2, 2010

Driver for EM Equities?

I read an article on Business Standard (click here) a few weeks back that offers a very nice perspective about the direction Emerging Market (EM) equities will take next year. It tries to analyze the question by looking at the relationship between US monetary policy and EM equities. It goes like this,

1990-1995 : Inverse relationship between US interest rates and EM equities

Low US interest rates drove capital  into EM economies. This was also a period when most Asian economies had current account deficit (CAD) and a leveraged private sector. They benefitted from low US interest rates.

1995 onwards: Relationship breaks down. Direct relationship between US interest rates and EM equities

Asian equities became a function of global growth expectations. Rising interest rates in the US signalled good health of it’s economy, which bode well for global growth and export demand.

So to answer the question what will drive EM equities next year, we need to access whether global economic recovery or loose monetary policy will impact EM more.

If we believe loose monetary policy will be the driving force, its bulls all the way with QE2 nicely lined up. (Capital controls and assets bubbles may be spoilers though)

If we belive do not believe in decoupling, then EM equities are a function of global growth expectations.

And obviously, if we believe, EM economies will successfully align themselves to be driven by domestic consumption, none of the above really matters.

Lets wait and watch.

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