Key global factors to watch for in multi-asset investing are indicators such as labor statistics, currency moves, oil prices and market reforms, say portfolio specialists at Standard Life Investments. Independent central bank policies affecting inflation and currency strength also will help separate promising investments from those with much higher risks.
Key Global Factors to Watch
Labor market indicators are important for determining the path of monetary policy, says Alexander Wolf, an emerging markets economist at Standard Life Investments. “For the U.S. and U.K., and even China, I think labor market indicators are some of the most important indicators you could look at,” he says.
Free currency fluctuations, particularly in emerging markets, are also leading indicators for investment decisions, says Richard House, head of the emerging market debt team. “Most countries now allow their currencies to fluctuate and to depreciate if they need to, because of an exogenous or an endogenous shock,” he says. “What concerns us is where that flexibility isn’t allowed or, as the case in Russia now, the central bank has intervened, spending precious foreign exchange reserves to support currency,” he says.
Oil prices can have a variable effect on markets, Wolf notes. “In terms of inflation and deflation scenarios, oil prices are having a very large impact, but the way it plays out is different between developed and emerging markets,” he says. “In many emerging markets fuel prices are subsidized, so it doesn’t directly translate into greater consumer spending. It’s more the fiscal savings from eliminating subsidies that are felt in emerging market countries,” he observes.
Reform is also important, Wolf reckons. “In emerging markets, it’s definitely important to monitor reform. That’s one of the major themes across emerging markets right now in India, Indonesia and China, to some extent,” he says.
Central Bank Policy Factors
Central banks play an enormous role in growth within the emerging markets, says House, of the EM debt team. “What we care about as fixed income investors is when central bank policy-making is independent. Most central banks have an explicit inflation target that they try to meet,” he says. “Most of the 70-odd emerging markets that we look at have those independent central banks,” he notes. “But Turkey is a big emerging market where there is political interference in central bank policy-making.”
Some central banks manage to stay out in front of inflation, Wolf notes, while others do not. “Trying to see where headline inflation is going to be, and the effect that it will have on core inflation after the effect of oil prices washes through, is one of the more difficult things that emerging market central banks are dealing with,” he says.
At times, policy paths can spell out profits, says Mark Foster, investment director for absolute return, LDI and multi-asset investing. “Brazil looks like it’s going to continue with tight monetary policy for the short term, but if you look beyond the short term, then we think there are concerns with economic growth. So if we think interest rates are too high with a medium term view, we can take advantage of that,” he says.
Policy timing across borders is also critical, Wolf says. “Another factor to look at is the divergence in policies between emerging markets and the U.S. We’re now in a position where we’ve seen many cuts across EM central banks for a variety of reasons. But all these cuts have been occurring just as we’re seeing an impending Fed rate hike cycle,” he concludes.
Click here to watch Part 1:How Today's Economic Conditions Affect Global Multi Asset and Fixed Income Investing
Click here to watch Part 2:Volatility in Emerging Markets Brings New Opportunities
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