Hermes: Why Emerging Markets Will Avoid Another Crisis

Chief Economist Neil Williams argues emerging markets are better positioned to handle interest rate rises in the US.

Emerging markets will not be plunged en masse into another crisis when the US Federal Reserve begins to raise interest rates next year, according to Hermes’ Chief Economist Neil Williams.

The Federal Open Markets Committee (FOMC) is expected to confirm the end of its quantitative easing (QE) program at a press conference later today, and market expectations have shifted to the first increase in the core interest rate and the wider effects this could have on the dollar, government bond prices, and global markets.

“I would not fall off my chair if the US picked up the QE baton again later this year.”—Neil Williams, chief economist, HermesWilliams said developing economies were far better insulated from adverse conditions than in previous crisis periods after taking time to “get their own houses in order” while western economies were still reeling from the nadir of the banking crisis. Emerging countries have reduced their dollar-priced debt significantly and have sufficient resources to even introduce their own versions of QE if necessary, he said.

“We shouldn’t fear a full-blown emerging market crisis,” Williams said. “There aren’t many major sovereigns with currency pegs fixed to the dollar, so countries can allow their currencies to release the pressure.

“Any blow-out is likely to be in local debt, and those countries can print money.”

Hermes—the fund manager owned by the BT Pension Scheme—predicts that the US will raise its core interest rate from its record low of 0.25% to 0.75% at the end of 2015, although Williams emphasised the movements would be “baby steps”.

His predictions have the Bank of England’s base rate at 1% at the end of 2015, while the European Central Bank (ECB) could reduce its core rate even lower to 0.05%, from 0.25% currently.

The ECB is likely to introduce “full-blown QE” next year, Williams said, in an attempt to stimulate the eurozone’s floundering economy. President Mario Draghi has already hinted that he would be prepared to buy up some private sector fixed income assets, but Williams said the ECB would likely begin to buy government bonds next year if yields rose.

The economist also claimed the Federal Reserve could return to QE in the coming months if it feels more monetary stimulus is needed. Pointing to five-inflation expectations of 2%, the same level as when QE was introduced six years ago, Williams argued that if the FOMC had had access to this data when it brought in QE, it would have pumped even more money into the economy.

“I would not fall off my chair if the US picked up the QE baton again later this year,” he said.

Related Content: ‘Good Chance’ of QE in Europe to Prevent Deflation, Says PIMCO & Central Bank Fears Decades of Negative Real Rates