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Markets  |  November 27, 2012 04:26:57

Mobius: Fiscal reef from the perspective of emerging markets

U.S. presidential elections are now behind us, re-elected Barack Obama took another four-year term at the head of the U.S., and we are finally able to, as well as in all major elections and regime changes, to estimate the impact of political developments on our investments. From the perspective of our team, investors must take into account two main factors: the future condition of the U.S. economy and President Barack Obama's stance in its foreign policy with respect to key countries, especially China.

U.S. will fall from the fiscal cliff?

The biggest current problem of the U.S. economy is approaching "fiscal cliff", a combination of jump increases in taxes and cuts in government spending, which is the result of a compromise U.S. politicians in an effort to reduce government debt, which has "swelled" to 1 trillion U.S.. If the Republican-controlled House of Representatives agreed with the Democrats controlled the Senate, the "fiscal cliff", or even budget control act of 2011, given in life in January next year.

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Some economists estimate that the spending cuts and tax increases contained in the Act plunge the U.S. into recession, causing a marked increase in unemployment and reducing consumer spending. Office for Budget U.S. Congress estimates that this could result in U.S. GDP in the next fiscal year decreased by up to 4%. In my execution of the Act could lead to economic disaster. Recession world's largest economy would undoubtedly have a negative impact on the world economy, especially the Asian export industry. If the U.S. will fall from the fiscal cliff, it could drag down with them and other countries.

We can hope for the best, but we should prepare for the worst

Good news for investors in emerging markets? Dependence on exports to the U.S. in Asia in the past decade generally declined. In absolute terms, while the volume of exports grew. Emerging markets, however, diversify its export base of the country outside of the U.S. and Europe (which is now experiencing its own debt crisis).

Today it is China's largest export market for companies from countries such as Japan, Korea, Vietnam, Thailand, Malaysia, Singapore and Indonesia.Even so, however, we should not forget that the U.S. is the world's largest economy with a GDP of around 16 trillion, followed by China with 8 trillion and Japan with 6 trillion USD. The Chinese economy is now so large that exports to the U.S. account for only 5% of its GDP, trade with the U.S. is still important, China is the second largest U.S. trading partner. A lot of people in this looks to China as the exporter. Country Wednesday from the U.S. but also imports a lot of things, last year, the volume of import from U.S. $ 100 billion. Bottom and held, from an investment point of view may in Asian companies exporting to the U.S. and European markets, there is a negative impact, stronger ones of them are according to us survive.

Monetary Policy

On the monetary policy, assuming continuation of the Fed monetary easing (QE) in order to prevent a sharp decline in the U.S. economy and improve the labor market situation. This attitude is also important for the rest of the world, particularly for financial markets, as the increased liquidity is likely to lead to higher prices in the financial markets and higher inflation. Many companies, however, should be able to raise the price of their products depending on inflation.   American monetary expansion also force other countries to proceed in a similar manner to prevent the weakening dollar, which would have ruined their exports to their own currencies.In the future, therefore, we are likely to observe a similar monetary expansion in Europe, Japan, China and other countries. Effects of loose monetary policy, then we can try in the next year.

Foreign policy

On foreign policy, Barack Obama held a strategy of "leading from behind" with an emphasis on greater cooperation with allies and open access to enemy action and perception.

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The President said that power alone can not protect the U.S., and it is therefore necessary to rely on allies. In his own words, "... power grows from its prudent use" and it is necessary to use the "humanity" and "restraint." It seems that the president is looking for a change in America's position in the global economy, which are very important and effective negotiating alliances instead of threats and application of military force.

Overall, I think that this approach is likely to have a positive impact on investment in Asia, it seems very unlikely any confrontation with China, even in case the tension betweenJapan and China for claiming territory lying between these countries. Japan is a U.S. has long been an important military ally.

Although it remains a lot of unanswered questions regarding the risks associated with the fiscal cliff I have a realist, especially with regard to the ability of the U.S. to solve their debt problems in a very short time. I am also optimistic with regard to the development of equity investments in emerging countries and Asia next year, whether the U.S. will fall from the fiscal cliff or not.

  © 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

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