The WSJ reports,"the fear that emerging markets will lack liquidity has been overstated, partly because the “wall of liquidity” beginning to come out of Japan has been ignored by the market, Franklin Templeton Investments fund manager Michael Hasenstab says.
The Bank of Japan is embarking on its largest ever quantitative easing effort and is on a path to start printing $1 trillion a year, which will be “quite meaningful” to emerging markets", Mr. Hasenstab told nearly 2,000 attendees at Wednesday’s opening session of the 2014 Morningstar Investment Conference in Chicago.
Japan’s huge pool of savings has begun to shrink as its population ages and the only entity big enough to fund its debt is the government, he said. That gives him confidence that Japan is going to be “massively expanding” its quantitative easing for some time, he said.
“We think that global liquidity is going to be fairly abundant for many emerging markets,” Mr. Hasenstab said.
As for the impact of interest-rate increases by the U.S. Federal Reserve, there are big differences between now and the mid-1990s, when the Fed raised rates and emerging markets had a lot of trouble, he said.
Pretty much across the board, these markets have doubled or tripled their international reserves, a cushion they didn’t have in the 1990s, he said.
In addition, many emerging-market nations have delevered massively their government balance sheets through decades of prudent fiscal policy, Mr. Hasenstab said. Korea, for example, has around 30% debt-to-GDP, and the Ukraine has only 40% debt-to-GDP, he said.
“We can no longer be universal about emerging-market economies,” but there is adequate liquidity and China will be a source of stability, he said. “We want to be very selective country-by-country.”
As for the bond markets, they will face losses and his concern now is how to deliver positive returns. He’s shifted his portfolio almost entirely into very short duration assets and is “selectively adding short duration assets in countries of good quality globally,” he said.
He now has long-dollar positions against the yen and the euro. When the Fed ends its tapering and begins raising rates, Japan and Europe will still be printing money, which is bullish for the dollar, he said.
“We think the dollar will decline in value over time against place” like Korea and Mexico, he said.
“There are opportunities, but it’s a smaller pool and you have to be very careful,” Mr. Hasenstab said of emerging markets.
