By Tim Seymour
The European Central Bank has started the interest rate tightening cycle and set in motion some normalization of policy. This indicates that global rates are indeed headed higher. Whether the Fed will follow in the immediate term is doubtful, and Japan is almost certainly not going to be making it more expensive for earthquake-ravaged companies to borrow any time soon.
But what is surprising to many is that emerging markets have been rallying in a rising rate environment as long as they have had enough sustainable global growth to draw on to buffer the rate increases.
There are two main types of headwind in the emerging world: inflation scares and growth scares. We believe the inflation scare is now under control after significant policy movement in China, India, Brazil, Turkey, Indonesia, Korea and even Russia — wherever you have inflation issues.
The ECB move if anything may give more support to the view that inflation will be alleviated that much more in the emerging markets, and this is positive for everything from EEM on down:
Global growth scare? Based on the numbers I am seeing in U.S. credit and the factory orders this week in Germany, combined with the fresh move higher in China PMI, the world economy is growing nicely.
The Japanese horror has led to some downgrades of the global GDP but have not derailed anything. Your biggest concern should be Middle Eastern instability leading to unsustainable oil prices.
And on the oil front, for the record: emerging oil and gas plays remain cheap to their historical valuations and despite a great run, offer value and momentum behind them from global allocators.
Review our previous weekly pieces all the way back to January and you can see our view that large-cap emerging oil and gas plays are well positioned to capture this combined paradigm of higher oil prices, flows into emerging markets and valuations that are cheap unto themselves.