Emerging markets coming off the turbulent boil?

February 11, 2014

Is it all over? Is the emerging market turmoil no longer a concern among investors, economists and academics? Measured at least in the last week, the market is recovering some lost ground. Maybe¬† January’s sell-off was enough and in the last week all boats seem to be rising once again. After all, there’s a new Fed Chair in Janet Yellen who has now officially taken over and the likelihood of easy monetary policy, tapering of asset purchases notwithstanding, isn’t expected to change.

MSCI’s emerging market benchmark stock index has rebounded 3.5 percent from a Feb. 4 low. The U.S. benchmark S&P 500 stock index has risen slightly more over the same period.

Taking the pulse of the market sentiment at the University of Delaware following a speech by Philadelphia Fed President Charles Plosser, it appears there’s less concern emerging market woes will take down the world. In a straw poll of the audience (rough estimate put the number at 350+ attendees), the message was upbeat.

In Delaware this morning, at least, the audience was asked how much they expected, if at all, the U.S. market would be roiled by turmoil in the emerging markets? Very little was the answer. The majority, 59 percent, said there would be little impact, although a sizable minority at 29 percent said there would be a lot. Just 5 percent said it was 1997 all over again and 7 percent said no impact at all. Plosser said the current volatility in emerging market currencies could still pose a risk if they were to spill over more broadly into other financial markets. However, he did not consider it a significant risk to the U.S. economy at this point. “While there continues to be some downside risks, for the first time in a few years, I see a potential for some upside risks to the economic outlook. We need to consider this possibility as we calibrate monetary policy,” Plosser said.

When it came to the Fed completing its taper of asset purchases by the end of the year, however, the answers were not so clear cut. An equal amount, 42 percent, said the fed would finish its course of tapering by year end. However, 42 percent said no, the emerging markets or an economic slowdown will force the Fed to stop its tapering measures, thereby keeping its asset purchase program, currently at $65 billion a month, going for longer. Plosser, by the way reiterated that he wants to see tapering finished sooner rather than later because at this point it is “neither helpful or essential.” Just to round it out, 14 percent said they didn’t know if the Fed would finish tapering in 2014 and well, 2 percent just didn’t care.

As for how long it would take the U.S. economy to get back to firing on all its economic cylinders, 54 percent in the room believe it will be more than three years, followed by 32 percent who thought it would take between two and three years and an optimistic 13 percent said less than 2 years.

Housing prices are expected to go up, so said 75 percent of the audience. Three percent thought they would fall over the next five years and 22 percent believe they will stay stable. In that line of thinking it is not unusual to see that 69 percent said, yes, consumer spending would rebound within 5 years while 31 percent said no, that’s just not happening.

As for unemployment, 52 percent believe it will fall over the next five years, although 39 percent expect it to remain flat. On Friday the U.S. reported the January unemployment rate dropped to 6.6 percent, a five year low. The balance, of about 8 percent believe it will rise over this period.

What do you think? Are the good people who gathered to hear Plosser speak in Delaware on the right track?

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The takeaway I had from the session was “things are better, but not good enough.”

There was a good level of business confidence in the survey we took (80 percent said they were “confident” or “very confident” in their own company’s prospects for 2014). But it’s sobering that, as you say, 54 percent of attendees are expecting at least three more years before the economy is really back. People want better economic growth, and sooner.

The middle-market business leaders and managers in the audience that day are more and more affected by the global economy (including for their retirement funds). “Think globally, act locally — both for the downside and upside” might be their guidance. They are wary that events and factors somewhere else in the world can drag on revenues/profits. But they’ve got optimism that they can find business opportunities in more places than ever. The businesspeople I talk with are more cautious than ever that they’ve got to protect balance sheets and income statements for downside risk. That also makes them better informed to position their businesses for upside opportunity.

David F. Lyons Sr.
President & CEO
Lyons Companies
(sponsor of the Economic Forecast event along with Delaware Council for Economic Education and Entrepreneurship at the University of Delaware)

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