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Markets  |  October 23, 2012 08:58:49

M.Mobius: Printers prepared

The global economy often reminds dominoes fall in which one part of the fall of others. In economics this year, which in many developed countries showed weak economic growth partly due to the high debt burden that meant moving the negative sentiment on emerging markets. Many investors, after the loss of confidence in advanced economies also lost confidence in emerging markets. The reaction to it from the central banks we have been actions to support economic growth in the form of the release of large amounts of liquidity. In the short term can have these events from advanced economies positive "trickle-down" effect (enrichment of poor people) in emerging markets in the long term, however, thererisk that this game starts with liquidity inflation.

  In September, the European Central Bank announced a program of "unlimited" buy bonds to support the euro in the struggle with the debt crisis.

Europe is currently undergoing a historic change that would in our team could have a positive effect on the shift in the global economy.Population in Europe are beginning to increasingly question the dominant role played by national governments, particularly in social terms. Europe and its management style seems therefore expect major changes.

Many European leaders have awakened from the dream continued high spending and awoke to the period in which it is necessary to deal with deficits. It can not be longer rely on limiting private sector, changes of state are performed in it are too cumbersome. In this respect, therefore, I believe that in the future we will see reforms of recent reforms.

Privatization of state-owned enterprises, in my opinion the potential to increase economic growth and prosperity in the long term. Privatization itself is not something that could be implemented overnight, in a way it is also a number of personal interests of people who would like to protect their positions. They are to me is these reforms that should lead to the unification and strengthening of Europe, whether in political or economic terms.

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While Europe has solved its problems, the U.S. is likely before the presidential elections, any efforts to reduce debt at all. Even in the U.S. we have not lived to see measures to promote economic growth and restore confidence in the economy, that when the Fed announced the purchase of the property-linked securities in the amount of $ 40 billion per month, ie the third round of quantitative easing (QE3).

Prolonged loose Fed policy

Whether the measure is labeling as QE3, QE4 or anything else, it seems that the Fed will continue to pump liquidity into circulation until he sees a significant reduction in the U.S. unemployment rate, the stagnated in August at 8.1%. The continuation of this program, however, in my opinion, require changes or even reform, including the one in the American tax system. In comparison to program the Fed domino chain reaction is stimulating economies from the European Central Bank, the Bank of Japan and other central banks, again with the form of pumping liquidity into the economy.


To me, this situation can upload investors in emerging markets, at least in the short term. Like many developed economies and many emerging economies this year faced an economic slowdown, that when investors began again be more averse to what they regarded as "risky investment", regardless of whether their judgment was correct or not . Events in developed countries over the past few years we have shown that there is no market risk-free.

P ccording to me, but not all the system pumped billions of dollars channeled into assets considered "safe harbors" that is, U.S. Treasury notes and bonds of other developed countries. The system provides a huge amount of cash that would, in my opinion could in an environment of increased confidence in Europe and the world economy partially ending the so-called emerging markets and frontier markets.

Increased risk of inflation

In connection with the flooding is necessary to mention one threat that we should be aware of inflation. Tou then developing countries suffer more than developed countries. In developing countries is generally greater part is represented by the low-income population that is more susceptible to the rise in prices of basic raw materials such as food or gasoline.

One way to reduce the negative effects of inflation, productivity growth, while that may be achieved by just limiting the role of government. Why? Because it is the state-owned enterprises, which have lower labor productivity.

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As an investor in my environment loose fiscal policies and increased inflation risks tasked choice of investments in specific companies in specific countries that have the potential not only to survive in such an environment, but even in it and prosper. One thing I have for years taught in the field is that you can make at any stage of the economic cycle.

  © Copyright 2012 Franklin Templeton Investments. All rights reserved.

The article was translated and reproduced with kind permission of Franklin Templeton Investments' Mark Mobius blog from www.

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