Investments in Emerging Markets are Increasingly Driven by Inflationary Fears in the US

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After the pull comes the push - at least as far as emerging market investments are concerned. The "pull force" is the attractiveness of emerging market opportunities for investors, while the increasingly important "push force" is the Federal Reserve's monetary policy which is pushing US money out of the country. The Fed's second round of quantitative easing (QE2), in effect equivalent to printing USD 600 billion, is fanning inflation expectations for the US dollar and is thus making investors rush for the safety of emerging market assets. Merar Investment Network helps smooth the investment process. Our platform allows connecting to emerging market opportunities with a few clicks of the mouse. 


For over a decade investment flows towards emerging markets used to be driven mostly by the pull factor: the attraction of business opportunities in rapidly developing economies with growing populations. The accession of China to the World Trade Organization in 2001 and deregulation in India have levelled the playing field in these large economies and have made investing there easier.

An even stronger pull force emerged in the aftermath of the 2008 financial crisis. The turmoil radically changed macroeconomic reality in a way that has boosted the prospects of emerging economies. Brazil, India and China kept hurtling along, against the background of recession in the West. These countries provided the only major growth opportunities in 2008-2009 and gave a ray of hope for the recovery of the global economy in those gloomy days.


Now a third powerful phenomenon has started shaping global investment flows: "the push factor". The worrying trend of growing public debt in the US is encouraging investment in emerging markets. By now it has become clear to institutional investors that the US government's only way out of a debt spiral is to inflate the economy and thus shrink the relative size of US debt. The recently announced QE2 by the Fed, to the tune of USD 600 billion, will do exactly that: hold down interest rates and raise inflation. Insitutional investors are already expecting this, as shows last month's successful US Government sale of inflation-linked bonds with a negative real yield. Investors who bought these bonds demonstrated that they are willing to lose money just to protect themselves from the unpredictability of inflation.

As a result, US monetary policy is pushing investors towards the relative security of emerging markets. The sudden rush of capital inflows may lead to the formation of asset bubbles in emerging markets. To prevent that, the governments of emerging economies will start considering capital controls at some point. If you want to invest in Asia or Latin America more or less freely, you might do it sooner: before regulations are introduced and before the bubbles have actually formed. Merar steps in here: we can help you in the investment process with our portfolio of over 200 emerging market projects seeking investors.


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