By devaluing its own currency, a country helps its own economy at the expense of others. As the United States gears up for another round of quantitative easing, emerging markets exchange traded funds (ETFs) might feel the backlash from a devalued dollar.
The World Bank, the International Monetary Fund (IMF) and the Bank of England’s governor Mervyn King warn about the potential problems that could come from more U.S. dollars floating in the market, writes Deborah Hyde for citywire. Economists are concerned about the greater foreign direct investments going into emerging markets as more money flows into the markets and the impact that could result. [Philippine ETF Tracks a Fast-Growing Economy.]
Already, many emerging governments have enacted measures to help reduce the amount of money being funneled into their economies. However, allowing such protectionist moves to continue may set a bad example, which could lead to reduced activity around the globe. [Africa ETFs: A Continent With a Lot of Potential.]
Still, some strategists believe that the amount of cash inundating the markets hasn’t reached a point where it could stifle emerging markets. While investors shouldn’t worry about this now, there’s a need to be on the lookout for potential bubbles forming.
Telltale signs of high FDI in a market include out-of-control inflation and high valuations within an emerging market. To watch for signs of trouble, try a simple strategy like trend following, or sign up for alerts.
For more information on the emerging markets, visit our emerging markets category.
- iShares MSCI Emerging Index Fund (NYSEArca: EEM)
- Vanguard Emerging Markets ETF (NYSEArca: VWO)
- Schwab Emerging Markets Equity (NYSEArca: SCHE)
- WisdomTree Emerging Markets Equity (NYSEArca: DEM)
- EGShares Emerging Markets Large-Cap (NYSEArca: EEG)
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.