It has been an exciting and sometimes scary week thus far as investors didn’t know if the current market volatility was going to be something bigger or this was just going to be some sort of a correction that needs to be endured, said Brian Jacobsen, chief portfolio strategist at the Wells Fargo Advantage Funds.
Thankfully the fourth-quarter US GDP data turned out to be pretty decent, which in turned helped the markets to propel a little bit higher. Also, the markets witnessed a lot of aftershocks related with some of the problems in the emerging market countries. The markets really didn’t see a lot of fallout from some of the moves of by say the central banks in Turkey or South Africa. The positive economic data from the US showed the recovery is going to trudge along, he noted.
Asked if the sell-off was more of a knee-jerk reaction because of the developments taking place in Asia or if it was the beginning of the correction that the market has been long expecting, Brian said when everybody waits for a correction, those pullbacks rarely happen.
It’s an example of the Game Theory: when everybody is expecting the market to go down by 10 percent, people start jumping in thinking it to be good enough. So there is a lot of support in that kind of an environment. That’s why when there was a lot of skepticism coming into this year it was actually a positive thing for the fundamental foundation. The problems coming out of the emerging markets like Turkey; if the central banks would not have acted, there would have been bigger problems because then there would have been concerns of some kind of an emerging market debt crisis unfolding before investors, he explained.
Asked to comment on Indian central bank Governor Raghuram Rajan’s criticism of the Fed’s rapid tapering without considering the fallout in the emerging markets, Brian said he completely agrees with the opinion of Governor Rajan. The Fed needs to focus on what’s going on in the emerging markets and recognize that there’s going to be fallouts of its action in the EM economies.
The Fed seems to have blinders on whereas they should not be ignoring it, because part of the Fed’s mandate is also financial stability. Originally that’s why they were created and really they were designed to stop financial panic. The Fed needs to look at this being an integrated global financial system and what happens in the US has effects at other places. If they decide to ignore it and pretend they don’t exist, that shows blind ignorance on the part of policymakers, he argued.
Asked if this problem is idiosyncratic in nature or is it systemic, i.e. if they are local or if left unchecked they are going to spread across the global financial system, Brian said some of the issues in the emerging markets are very idiosyncratic. There are issues which are very specific to those countries and are unlikely to spread out.
The current environment is more like the 1994 Mexican crisis as opposed to the 1997-98 Asian financial crises because the exchange rate system is much more flexible. Also the countries involved have much lower debt burdens and it’s not the big banks that are holding onto the debt, he concluded.
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