Michael Hasenstab, bond fund manager at Franklin Templeton Investments, said Wednesday the Bank of Japan’s economic stimulus program will help propel the continued growth of emerging markets, despite widespread fears that the global economy will take a hit as the U.S. Federal Reserve winds down quantitative easing.
“The fear is that tapering will lead to a mid-nineties-like collapse of emerging markets. We think that is wrong,” he said during a presentation at Morningstar’s Investment Conference in Chicago. The Bank of Japan’s aggressive $1 trillion annual stimulus program is creating a “wall of money” washing over the globe. “The market has focused so much on the Fed and Fed tapering, it has ignored Japan’s aggressive stimulus.”
With debt equal to two and a half times its GDP, “Japan can’t afford the stimulus, so where are they getting the funds? The only entity big enough to fund that indebtedness is the government. That looks like debt monetization to me. This gives us confidence that Japan will be a source of global monetary liquidity for years to come.”
As for his $70 billion Templeton Global Bond Fund, he’s moved to the very short end of the yield curve, and looks for bonds in countries that can earn higher yields with little interest rate risk. In particular, he says, Hungary, Poland, Mexico and South Korea are among the countries poised to handle a pull back in U.S. monetary stimulus. The fund is long the dollar against established currencies like the euro and the yen, but he thinks the dollar will decline against more “responsive’ economies, like South Korea and Mexico.
Hasenstab pointed to the fact that the cushion of reserves available to emerging market governments is far higher than it was in the mid-nineties. “In the mid-nineties, Mexico was living day to day on foreign capital.” Five percent of Mexican GDP comes from foreign investments. Today, even if all that money were pulled out completely, “the international reserves (available to Mexico) could cover any outflow.”
Also, while the balance sheets of the developed world have “exploded,” emerging market countries are largely paying down their debt. South Korea, for example, has a debt-to-GDP ratio of 30 percent. Ukraine, a market where Hasenstab continues to be bullish, has a debt-to-GDP ratio of only 40 percent. “If they need to borrow, they can without debt constraints.”
Of course, none of the outlook for emerging markets can hold together without a take on China, he said. Hasenstab said a hard landing in China isn’t likely. He’s optimistic on the current Chinese leadership providing economic support for higher domestic demand among Chinese consumers. “You can get two-thirds of (predicted) growth in China coming from domestic consumption” because of increased earnings of Chinese workers.
Chinese leaders are liberalizing interest rates, and moving capital from state-owned industries to the private sector. “The liberalization of interest rates is the most important agenda of China’s in the next ten years,” he said. He expects growth will continue around seven percent, but as the country moves toward more open and liberalized capital markets, a recession in China is likely. But long-term, China’s growth of consumer demand will be a boon to the global economy.