Asia Market Risks Lie Ahead After QE Exit

The question for many in Asia regarding the U.S. Federal Reserve’s ending of its QE program is… how is this going to affect us?

The quantitative easing (QE) program was constructed to help the U.S. and (ultimately) the global economy from sinking even further into the abyss after the financial crisis of 2007–08.

The Federal Reserve (“the Fed”) used trillions of dollars to buy up paper assets to help stimulate the economy. On Wednesday, that program supposedly ended, as the Fed believes the U.S. economy is now strong enough to stand on its own two legs (or at least it hopes it is).

Although a zero interest rate policy (ZIRP) will continue into the near future (some predict even longer), the Fed believes QE can be put out to pasture in the meantime.

International Monetary Fund (IMF) Deputy Managing Director Zhu Min recently commented on the situation in regard to what to expect for emerging economies, stating that the risks are different this time around than they were in spring 2013, when former Fed Chairman Ben Bernanke tried to taper QE. The risks back then were on a macro level, but over the past 7–12 months emerging economies have strengthened their macro economic structures. This time he sees market risk as something to be concerned about.

The benefits of QE have been nothing short of phenomenal for emerging economies, as a purported US$650 billion has flowed into emerging markets.

Question: With QE stimulus ending, where does all that money and its capital gains head to next?

Emerging market economies will now need to start funding themselves, no longer having the luxury of a QE world with inflated commodity, credit, and capital markets.

I view this as a temporary phenomenon, though, because once the tide rushes out it always rushes back in—especially when prices and valuations become cheap. If the U.S. economy is truly strong, it will certainly need strong emerging economies to help buoy it up, and certainly investors will not shy away once a support is established. Moreover, ZIRP is still “easy money” and easy money always needs to find a home…

The question of fragility is once again at the Fed’s doorstep, but I don’t believe that anyone discounts the possibility of the Fed firing up asset purchasing again if the situation merits. This seems especially true with reputed dove Janet Yellen sitting at the helm.