Emerging markets are seeing an influx of capital and major growth, but some feel that the hot money coming into emerging market exchange traded funds (ETFs) might be a little too hot.
Their possible responses, which have both an upside and a downside, include:
- Allowing currency appreciation – that is, if inflows are fundamentally driven.
- Foreign exchange intervention, which could ease exchange rate pressure but lead to more credit growth than is health.
- Another option is controlling capital inflows, but they’re not always effective at doing what they’re intended to do.
Murray Coleman for Barron’s reports that BHP Biliton (NYSE: BHP) backed out of their deal to buy Potash (NYSE: POT), as the prospect of overheating emerging markets is posing a threat to global growth. Although emerging markets are forecast to post larger growth over the next few years, compared to developed markets, the trend of caution toward overheating markets is evident. [Asia ETFs; Fast Growth May Have Consequences.]
For now, the trends in emerging markets are firmly in place. Have a buy and sell discipline and be ready to act if emerging markets take a spill.
Tisha Guerrero 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.