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Mobius and monetary policy: a roadmap of EM measures

The emerging markets veteran delves into the strategies of developing world central banks to reveal how investments are being impacted.

EM loosening policies

Fourteen central banks from around the globe kicked off 2015 by opting to engage in some form of monetary policy loosening, generally in the form of interest rate cuts or asset purchases.

This highly-active environment is why the head of the Templeton's Emerging Markets group, Mark Mobius, expects divergence in monetary policy to be a key theme in 2015.

In his latest commentary, Mobius argued that, with the Federal Reserve's expansion of its balance sheet, along with measures from the Bank of England, the Bank of Japan and the ECB, the emerging markets’ general biases also appear to be towards easing at this stage.

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EM loosening policies

Fourteen central banks from around the globe kicked off 2015 by opting to engage in some form of monetary policy loosening, generally in the form of interest rate cuts or asset purchases.

This highly-active environment is why the head of the Templeton's Emerging Markets group, Mark Mobius, expects divergence in monetary policy to be a key theme in 2015.

In his latest commentary, Mobius argued that, with the Federal Reserve's expansion of its balance sheet, along with measures from the Bank of England, the Bank of Japan and the ECB, the emerging markets’ general biases also appear to be towards easing at this stage.

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China

Current mood: easing

Mobius said, following a surprise interest rate cut in November, the People’s Bank of China (PBOC) cut banks’ reserve requirement ratios (RRR) by 50 basis points (0.50%) at the start of February. This was with the goal of pushing an estimated 600 billion yuan (US$96 billion) into the money supply.

‘The government hopes these measures provide an economic boost amid a number of weaker-than-expected statistics, including a key manufacturing barometer, the purchasing manager index (PMI), which dropped below 50 in January 2015,’ he said.

‘We are not concerned that China’s growth has been slowing, and believe 7%+ growth for an economy of this size appears quite robust.’

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India

Current mood: easing

‘Despite robust GDP growth, in January the Reserve Bank of India surprised markets with a 25 basis points cut in the key interest rate to 7.75%. Easing inflationary pressures led the Bank to reduce interest rates as part of efforts to further boost economic growth,’ said Mobius.

The veteran investor added that, while India’s consumer price index increased to 5.0% in December 2014 on a year-over-year basis from a record low of 4.4% in November, the rate remained significantly lower than the 8.8% recorded in January 2014. Mobius said this adds some measure of comfort to loosening policy.

He said: ‘Reserve Bank of India Governor Raghuram Rajan has stated lower oil prices have dampened the threat of inflation in the country, and indicated that further interest rate cuts could be forthcoming.’

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Brazil

Current mood: tightening

Mobius believes Brazil would like to see some of the deflationary pressures Japan and the ECB have experienced, as its consumer price index rose 6.4% in 2014, the fastest pace since 2011 and above the central bank’s target.

’Despite sluggish economic growth in Brazil, inflation worries prompted its central bank to raise the benchmark interest rate by 50 basis points to 12.25% on January 21 to its highest level since August 2011,’ he said.

‘In order to support the government’s fiscal crisis, finance minister Joaquim Levy announced a number of measures, including increases in taxes on fuels, credit and imports as well as the end of tax breaks on automobiles.’

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Russia

Current mood: easing

The EM veteran said Russia’s central bank unexpectedly reduced its benchmark interest rate by 200 basis points to 15% in January to support the domestic economy. This happened shortly after the central bank raised interest rates to 17% from 10.5% in December.

‘In the past couple months, the government announced a series of measures, worth at least US$35 billion, to tackle the economic crisis in the country.’ But, Mobius added, Russia still has a number of challenges ahead which monetary policy alone cannot solve.

‘In January, international ratings agency Standard & Poor’s downgraded the country’s sovereign credit rating to BB+ from BBB-, citing deteriorating asset quality in the financial system, restricted access to international capital markets and likely economic recession in 2015.’

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Turkey

Current mood: easing

‘The central bank in Turkey reduced its key benchmark interest rate by 50 basis points to 7.75% in January as inflationary pressures eased following a decline in oil prices. The consumer price index eased to 8.2% on a year-over-year basis in December, from 9.2% in November,’ Mobius said.

He added Turkey is now facing a number of crosswinds. ‘The central government budget deficit widened more than 20% year-over-year to $9.9 billion in 2014, and the current account deficit for 2014 was $45.8 billion, narrowing from $64.7 billion in 2013.’

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Monitoring possible aftershocks

Mobius said much of the money intended to flow out to the marketplace from stimulus measures has remained on banks’ balance sheets. This, he said, is much to chagrin of the central bankers who wanted the banks to initiate lending so their economies would be revived.

‘The low interest rates are now a disadvantage to regular bank deposit savers and pensioners, while the equity investors have generally benefitted. Many savers could be also hit with another problem down the road resulting from all this easing - high inflation and asset bubbles.’

For now, Mobius believes central bank easing efforts will continue to provide liquidity to the markets, and he expects that they could help drive flows into equities globally as investors search for yield. ‘But we’ll also be watching for any potential aftershocks,' he added.

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