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TheStreet Open House

Why Tapering May Be Bullish for Emerging Markets

Stocks in this article: GMM SPY

Combine the extremes, and you will have the true center. -- Karl Wilhelm Friedrich Schlegel

NEW YORK (TheStreet) --When consensus opinion reaches an extreme, it is often wrong. We could very well be seeing that here regarding fears of the Federal Reserve tapering its quantitative easing (QE) this week and its supposed negative effect on emerging markets.

All year long we've been hearing the same story, that any Fed tapering will disproportionally hurt the emerging markets as money will flow out of emerging countries in search of safer U.S. assets.

Let's think this logic through, step by step.

If tapering is supposedly disproportionately bad for emerging markets, then the endless quantitative easing over the past few years should have been disproportionately good for emerging markets. Not only has this not been the case, but the opposite has been true.

The chart below illustrates a price ratio of emerging markets -- as seen by the SPDR S&P Emerging Markets (GMM) exchanged-traded fund -- to the S&P 500, as seen through the SPDR S&P 500 ETF Trust (SPY). A declining ratio as we have seen over the past few years indicates that the numerator (emerging market equities) have significantly and consistently underperformed the denominator (S&P 500). As emerging markets have clearly not benefited from quantitative easing, then, why should we assume that a reduction or elimination of the program will have a deleterious effect?

We should not, in my view. As Brazil's Central Bank Governor Alexandre Tombini said last week, quite the opposite may in fact be true. Tombini shocked the consensus in saying that the sooner the U.S. Federal Reserve begins tapering its bond-buying program, the better it would it be for the global economy and emerging market countries such as Brazil.

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