When you think about the heart and soul of QE programs in the U.S. and Japan, currency depreciation or suppression, it becomes clear why this is the case. If the U.S. and Japan are benefiting from the depreciation or suppression of their currencies, then non-QE countries like Brazil should be hurting by an unwanted strengthening or bolstering of their own currencies. Such a strengthening has damaged exports in emerging markets to the benefit of U.S. and Japanese exports.
While Japan has been more explicit in its desire to weaken the yen, outgoing Chairman Ben Bernanke and the U.S. Fed have been careful in avoiding the issue. But in a zero sum game of global trade, there is no escaping the reality of the situation, and in many respects 2013 has been the year of QE countries vs. non-QE countries in terms of market performance.
If we do end up seeing a tapering then, either this week or in early 2014, an inverse logic should be applied. As it is clear the U.S. has been the primary beneficiary of the Federal Reserves policies, any reduction in Fed stimulus should disproportionately hurt U.S. equities.
While many are saying U.S. equities could decline on a tapering, no one is suggesting that they will suffer a worse fate than emerging markets or that emerging market could outperform in that scenario. This is in large part due to recency bias as the U.S. markets have significantly outpaced emerging markets over the past three years.
Our ATAC models used for managing our mutual funds and separate accounts are devoid of such bias and are currently favoring emerging market equities. Don't be surprised if in 2014 we see convergence between QE and non-QE market performance, especially if tapering begins.At the time of publication the author had no position in any of the stocks mentioned. Follow @pensionpartners This article was written by an independent contributor, separate from TheStreet's regular news coverage.
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