(October 4, 2012) — Weak economic growth and heavy debt burdens in many developed markets have had a domino effect on emerging economies, with investors increasingly losing confidence, according to Franklin Templeton Investments.
“In response, central banks have taken actions to boost economic growth and prime the liquidity pump,” a paper by the firm says. “In the short run, these actions in the developed markets can have a positive ‘trickle-down’ effect on emerging economies, but they could result in a more negative long-term game-changer—inflation.”
As the role of government in Europe transforms, leaders are realizing they cannot run up deficits as freely as in the past.
The paper continues: “While Europe is having these debates, the US seems to be putting any debt reduction efforts on hold until after the general election in November. To help boost the economy and restore some confidence in the meantime, the US Federal Reserve (“Fed”) announced it would buy $40 billion per month in mortgage-backed securities on the open market, the third round of its quantitative easing program (QE3).”
What are the implications of such government actions? The paper asserts that these actions may be positive for investors in emerging markets, at least in the short run. “Along with many developed markets, many emerging economies have been subject to slowing growth this year, and investors have been reluctant to place their assets in what they perceive as ‘risky’ markets, whether rightly or wrongly so. Events in the developed markets in the past few years have proven no market is without risk,” the paper concludes.
As banks keep priming the liquidity pump, investors must prepare themselves for the potential threat of inflation. After all, the paper concludes, “there are always potential opportunities somewhere.”