A Summer of Overheating in Emerging Nations

For every day spent by the Federal Reserve patiently allowing QE2 to end, the notch is turned one degree higher on the stove of emerging nation economies. The Fed’s loose money policy has sent investors scrambling to emerging markets such as those of China, India, Brazil and Russia. Since the inception of QE2, the Chinese and Indian capital markets have been soaked with foreign investment, driving growth in its economies…and inflation along with it.

China faces the most exposure to inflation, having recently showcased a widening trade surplus. The rise in prices of yuan-denominated goods puts pressure on the central bank to allow the Reminbi to appreciate – and fast. Complicating the situation is China’s loosening grip on the globalization of its currency. The Chinese will lean on the cautious side in this matter, making any currency fluctuations a long, drawn-out process.

India and Brazil have suffered from the same inflation as China – India to a lesser extent. Brazil’s capital inflow appears to be far from over, with investors pumping money into the country that will play host to both the World Cup and Olympics over the next five years. Growth of 5.5 to 6% over the next year is expected for an economy that is becoming a more of a global player every day.

I expect the economies of the three emerging nations described to move in close tandem with one another, as growth figures are in the same ballpark and strong trade relations exist between China and Brazil. The duration of the Fed’s QE2 exit strategy will play an important role in the strategy taken by central banks to contain inflation and restore consumer prices.

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