Keeping the Liquidity High
By: Amit Bhushan Date: 2nd June 2016
The developed world mostly Europe and Japan are working overtime to keep liquidity high in their domestic markets. This is while the USA has ensured that it won't spook the globally markets by raising USD interest rates. It allows the firms in these markets to make adjustments which are a bit less painful when liquidity conditions are relaxed. However it also allows some of the foreign investors to off load the securities at decent valuations. That is should they decide to exit from some of these investments.
This perhaps might be happening and erstwhile investors from energy rich nations that may require to re-coup some of the past investments in order to finance the deficit back home, will be enjoying the circumstances. The point to be noted is that inflation in these countries remains in negative to very low territory which is a signal for consumption demand not picking up although the capital markets keep moving up and down.Easy liquidity allows such moves by energy rich nations to exit past investment to be much easier than otherwise as such deals could have been possible at minimal profits or even at loss under more tough liquidity.
Many such investors with exposure to China may already have made first moves after having sensed a need for readjustment of their investment portfolio, there as well. The prevailing liquidity has again started to move into commodities, perhaps sensing that the same has become a better bet than say companies with fragile profits in some of the more developed nations. While a lift in commodity prices may come as a relief for some of the commodity exporters however its sustainability might already be in doubt.
Given falling exports in most of the Asian nations with local consumption also not rising at a faster clip, the reason for rise in commodities remain unclear. Also the new or abandoned projects may not be showing any signs of pickup as of yet at least in exporter nations. For most of the commodity exporter nations, this may only signal a continued focus towards developing domestic services and improve domestic employment and consumption.
The manufacturer exporters in Asia may face a bit greater challenge as input cost rises while the price of exports to developed world doesn't. No wonder the currencies of these countries are falling while banking shows accentuated weakness. This again might lead to impart greater focus on domestic services and consumption.
May be this is time to allow for the impending rise in the US Dollar interest rates, although the new infrabanks supposed to be financing the infra in emerging nations to ensure continuation of their development may not be in shape as of yet. This is besides the countries with unsustainable public debt & difficult economic situation like Greece or Venezuela etc. still being in queue for a comprehensive support package from whoever can pick the tab. It is perhaps interesting to note that the top companies in the USA have had a fall in valuations as well as have not shown improvement in revenue forecasts.
This is even as there is a dearth of data about the unlisted company's valuations. While the liquidity seems in emerging markets seems that would get impacted by any rise in interest rates, however most likely scenario is rise in interest rates would perhaps propel investors to be more careful while selecting investments whereby which commodities may not rise in prevailing tough demand conditions. This may propel investments being ploughed towards growing services, job and domestic consumption. And also perhaps help borrowers in some of the more developed nations to become more accommodative of investors' concerns. This might allow for a better direction to funds.