The 3rd Quarter of 2013 is one big roller coaster ride for global financial markets, especially those in emerging markets. The end of August marks the steep ride down and the start of September marks the quick rise back up. My prediction that the fears of the Syria crisis will be forgotten soon enough proved to be correct and the market rallied on the news that the US Federal Reserve made the decision to postpone the tapering of the quantitative easing program (QE). Shortly after, the financial markets got spooked by the political high drama in Washington DC, as the US government suffers its first government shutdown in 17 years in which the Republican controlled House of Representatives tried to threaten the President and the Democrats controlled Senate, into closing down the government if the Democrats do not agree to the demands of scraping or postponing Obamacare.
US Government Shutdown
This showdown, is perhaps only the prelude to the more crucial and critical debt ceiling debate, in which failure to get the Bill pass, may lead to a possible default on the US treasury, which will directly lead to a global financial chaos. This scenario echos the 2011 debt ceiling debate which led to a severe market correction and the US government managed to avert the worse case scenario by passing the Bill to rise the debt ceiling, on the very last minute of the dateline. Read here for my past article on the previous US Debt Ceiling Crisis.
My hypothesis for this upcoming US Debt Ceiling Crisis will be similar to the one I made in 2011. No sane politician will commit political suicide by taking down the global financial markets by forcing a default on the US Treasury but between now and Oct 17, the financial markets will be in great turmoil if both parties continued to maintain their stance for a prolonged period of time.
Judging from the polls conducted by major media, the final ones that will finally give way will be the Republicans, given that this Government shutdown mirrors the shutdown between President Bill Clinton and the Congress in 1995-1996. The end game resulted in a defeat by the Republicans and President Bill Clinton being re-elected for a second term. Many of the old and more seasoned Republican congressmen warn of a similar political disaster, but the younger and more radical members of the Tea Party let the warnings go unheeded and bet on a showdown between the house and the "weak-willed" President Obama will lead to the President capitulating and their victory. Looks like President Obama has also dug in for the fight.
This will be a good buying opportunity as the financial markets will promptly bounce back once the political uncertainty sort themselves out in due time. Meanwhile, the next big risk event to watch out for will be the end of the year US Federal Reserve committee meeting when the topic of QE tapering will once again, rear its head.
Strategy Going Forward
The emerging market funds, Turkey and Thailand equities, soared back strongly, reversing all their losses caused by the Syria crisis within 2 weeks. However, the political uncertainty in US knocked down a few percent of their performance in the past few days. I will maintain the current allocation till the end of the year, as the economic and political uncertainty pass and the financial markets, especially those from emerging markets, should soar ahead after being bounced around since May. Moving forward, I will start to cut down the allocation towards US and Emerging Markets and reallocate the funds towards the quietly improving European Markets. Meanwhile, Emerging Markets equities are still a huge laggard as compared to US & European equities and its potential into the end of the positive 4 quarter, will be pretty big.
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