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Meeting Reinforces Role of Emerging Markets

Unwinding of Stimulus a Main Concern

 Amy E Buttell The Group of 20 Nations’ meeting in Pittsburgh at the end of September confirmed the rise of emerging markets. The torch of leadership on international economic issues has passed from organizations dominated by the developed world to a forum that represents more than half the world’s gross domestic product and includes developed nations as well as rapidly growing countries such as Brazil, India and China.

Although this wasn’t unexpected, the confirmation that the G-20 is the world’s international economic forum, a position previously held by the Group of 8 nations, means that emerging nations are taking their place on the world’s stage and in the world’s markets, says Fariborz Ghadar, Ph.D., the William Schreyer Chair of Global Management, Policies and Planning at Pennsylvania State University in State College, Pa. “What came out of this meeting reinforced the erosion in the industrial position of the United States versus the rest of the world, and, in the past decade, the rise of the emerging market economy.
“It’s clear that anybody who is not planning to retire in the next two years needs to have some position in emerging markets. They’re volatile, but, depending on your risk preference, you need to have some, if not a significant, amount of exposure to the emerging economies.”
What was less clear in the aftermath of the G-20 is the process for unwinding the massive stimulus measures undertaken by the United States and foreign governments. This has major implications for the markets, says Craig Thomas, senior economist with PNC Bank in Pittsburgh. The G-20’s lack of specifics in this and other areas breeds uncertainty, which is bad for the markets.
“I am quite confident that we could have seen a V-shaped recovery given what has happened and how things have come back fairly strongly so far,” Thomas says. “But we’re not going to have a truly V-shaped recovery because there is so much uncertainty out there. We don’t know what the tax, trade, energy and executive compensation policies are going to be. All this uncertainty keeps us from investing and keeps companies from hiring.”
Chester Spatt, Ph.D., agrees that the timing of the unwinding is important in several ways, including the circumstances under which interest rates will be increased in the United States and overseas.
“Increasingly, this is a subject of concern,” he says. “If the monetary stimulus is withdrawn sooner rather than later, the markets might take that as a positive sign, because it would signal that the economic situation is improving.” Observers expect the Federal Reserve Board to begin raising interest rates in the next year in an effort to avoid problems with inflation in the future. So investors can expect higher yields, but not much higher.
On a positive note, the G-20 set a deadline of 2012 for an international exchange and clearing of derivatives and a deadline of next January for the publication of comprehensive information on the international energy markets, Thomas says. “This is important, because they are trying to minimize the potential for speculators to create a lot of volatility in the energy markets. They’re saying that they’re going to increase the reporting on this important commodity so the market will be better informed and investors can make better decisions.”
Although many individual investors don’t make use of derivatives, they played a major role in the market meltdown. By implementing measures requiring that derivatives are traded on central exchanges and contracts are reported to trade repositories, the G-20 and national governments hope to diminish the destabilizing effect that derivative trading can have on markets and the volatility of individual stocks.
In a move largely ignored by the news cycle, the G-20 made an important pronouncement about accounting standards, setting a deadline of June 2011 for the convergence of U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards. The Securities and Exchange Commission has also promised to re-examine the issue of whether the United States should switch from GAAP to IFRS; the G-20 deadline may give extra momentum to the adoption of IFRS in the United States.
If the SEC reverts to its previously announced timetable, the largest U.S. publicly traded companies will begin to file financial statements under IFRS by 2014 and have the option to file under IFRS in 2011. Overseas-based companies will also have the option to file under IFRS in 2011.
IFRS is quite different from GAAP, as it’s principles-based rather than rules-based, so investors who rely on financial statements to make investing decisions will have to become conversant with IFRS. In the meantime, even without a definite time frame for a potential switch from GAAP to IFRS, converging the two standards means more accounting changes for publicly traded companies and the investors who follow them.

Freelance writer Amy E. Buttell of Erie, Pa., covers mutual funds for BetterInvesting. She’s also the author of the second edition of the association’s Mutual Fund Handbook.

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