EMs vulnerable from QE, warns Hasenstab

Franklin Templeton’s bond guru Michael Hasenstab has warned emerging market debt could be hampered by trickle-down inflation caused by quantitative easing (QE).

Mr Hasenstab, manager of Franklin Templeton’s giant Global Bond, Emerging Market Bond and Asian Bond funds, said that although emerging countries had much less outstanding debt, the amount of new money being printed by western central banks meant he was “cautious” on risks relating to interest rates.

“We have the Bank of England (BoE), the Federal Reserve, the Bank of Japan, the ECB [and] the Swiss National Bank all printing an unprecedented amount of money. Never in the history of central banks have we experimented with this amount of printing, and to think that there are no longer-term consequences would be naïve,” he said.

“Those effects may not be felt immediately, but ultimately the money that is printed in those countries will flow globally. Emerging markets are probably the most vulnerable to the immediate inflationary impacts of this massive quantitative easing.”

Central banks are undertaking stimulus programmes in order to increase the amount of money flowing through the financial system. The BoE has injected £375bn into the economy through buying up government bonds, while the Federal Reserve has put more than $1.2trn (£746bn) into the US system since November 2008 and also launched a third round of QE.

Switzerland’s central bank last August launched a programme of monetary actions designed to devalue the Swiss franc, including a form of QE, while Japan increased its QE programme by ¥5trn (£40bn) in February.

These actions usually cause the value of the currencies involved to fall, and can also add to the flow of money into other countries, thereby raising prices in those areas. Mr Hasenstab said he saw little value in countries that are printing money and devaluing their currencies.

However, he praised action taken by the ECB to stabilise the eurozone earlier this month, which will involve “sterilised” purchases of government debt by the central bank.