The 2008 financial crisis brought more than a credit crunch to the world but it also brought the new normal rate regime. As Central Banks deployed both their conventional and non – conventional monetary policies to counter the downside risk rained in by the subprime bubble and credit crisis, something dramatic happened to rate in most of the advanced and developed countries. We saw rates moving from the highs to a sudden new normal of 0%, with some markets going well below the ceiling of 0%. The likes of EU, Japan, and Switzerland took up drastic monetary policies to revive their economy. Although the global economy faced the same threat, developing and emerging economies found growth from hungry fund managers and institutional investors who had to report some return to their shareholder. The risk premium of asset allocation was at it lowest minimum as the so called high-grade assets were within their lowest limits. Some analyst, with which I associate my self would agree that those days saw funds more from traditional safe assets into emerging and developing economies like Brazil, India, South Africa and the likes. Fast forward to current fiscal year where most advanced countries have recovered or are on the path to recovery, we are seeing some hawkish talks about rates again, the US Fed has increased its rate from the lows of 0% to 1.25% as at end of June 2017, with additional anticipated raise at the end of the fourth quarter, rates have started to move back to its regular highs( Although a sluggish inflation growth threatens the US Fed on their path to rate normalization .). Mario Draghi, the ECB’s president has also hinted at a more hawkish move going forward.
The real question here for developing and emerging economies is, how can they still attract such huge inflows as rates head back up. How would they maintain a stable exchange rate as fund managers and institutional investors look to calling funds back to the safe assets? What premium would they be willing to accept as a fair value after experiencing prolonged low levels of risk premium regimes?
Author: Paul Eshun
Investment Analyst at Parkstone Capital