Every week, market veteran and president of Winston Capital Advisors, Fabian Onetti, gives his take on the key market events of the past few days and what investors should be looking out for in the days ahead.
The famous book The Perfect Storm tells us the story of three different small storms that by coincidence fused together around New England to form a giant and deadly storm in 1991. Since most meteorologists saw only the small storms, by the time they fused together it was too late to tell people about the impending danger. The result was serious property damage and the loss of many lives.
We all know by now that the Fed has embarked on a normalization path for interest rates. We also know that somehow they are trying to shrink the balance sheet from the gigantic $4.5 trillion to a more manageable $200-$300 billion. All of this without disturbing the markets too much for fear of contagion to the real economy. That is one of the storms in the horizon.
Where are the others and can they get together?
The European Central Bank has also announced that we are close to the end of the days of easy monetary policy and unrestricted bond purchases. The Bank of Canada raised rates for the first time in seven years. The Bank of England is about to raise them very soon, in the last vote it was a very close call. The only big bank still quiet is the Bank of Japan. See chart below.
As international advisors, we all must look beyond the US dollar and the shores of America. Historically, emerging markets live off the surplus of savings and investment of the developed markets. When rates are low and clients, institutional and retail, reach out for yield then emerging markets are the usual beneficiary, in both hard and local currency bonds.
However, when the tightening cycle of central banks starts that money goes back home. Many times this creates a large exodus that affects emerging markets to varying degrees.
If we go back to the last cycles we have 1994 (Tequila Crisis), 1997-98 (Russia crisis), 2006 (global crisis).
What will be the response if we have not one but many central banks trying to normalize rates and also reduce their balance sheets, taking liquidity out of the system?
Will the different central banks talk to each other to avoid policy mistakes? What if in 2018-19 we have two or three of them raising rates at the same time? Are the emerging markets prepared for such an event, do they have enough local savings and fiscal discipline to face the event?
After many years of change are all the emerging markets the same?
These are all questions we need to ask ourselves in the current environment.
Winston Capital Advisors is a firm that advises international advisors on capital markets and wealth planning. A former director at Morgan Stanley, Onetti has over 30 years of experience in international wealth management.