The effects of the fed’s investment climate: what to expect Ukraine

Последствия влияния ФРС на инвестиционный климат: чего ждать Украине

From the point of view of losses in current year will be far from the worst for investors. But the number of assets that are not demonstrated yield growth this year has all chances to become the champion.

This year was rich on extraordinary market trends and challenges that created problems for virtually all asset classes: according to Ned Davis Research, things aren’t so bad since the days of President Richard Nixon.

That’s interesting! None of the strategies nor the shares of major companies or firms of small capitalization U.S. and international stocks or securities of developing countries or US treasuries or bonds of the investment level, nor the papers for raw materials or real estate, said a strategist at Ned Davis ed Clissold. Most of these assets are getting cheaper, and the growth of a few others is measured in percentage in the single digits — less than 5 percent. Such a phenomenon was last observed in 1972, said ed Clissold.

The situation, according to experts, is unique. Normally, the market reflects the balance, that is, when some assets become cheaper, others are growing. During the financial crash of 2008, U.S. treasuries, for example, showed a rally. In 1974, a bright spot on the overall dark background was a commodity. In 2002, were encouraging real estate investment funds. In 2018 to invest almost nowhere.

Clissold says that the root of all evil in the curtailment of incentives by Central banks, particularly the Federal reserve. “The markets are overwhelmed with concerns about the lack of an unprecedented monetary stimulus will affect the value of the assets”, — wrote in last week’s review, chief strategist at Ned Davis Research in the US. During previous periods of turbulence “which the markets were in a bullish phase,” writes Clissold.

We will remind that this year the Federal reserve three times raised the key rate. The fed has openly stated that doing this would prevent overheating of the economy, what Donald trump reacted to verbal statements eccentric character: “Every time we do something big, he (ed the fed’s Jerome Powell) raises the stakes, it seems he just likes to raise rates.” For reference, in the second quarter the growth of U.S. GDP in annual terms amounted to 4.2% (maximum in 2014), in the third quarter to 3.5%.

And already 28.11.2018 D. Powell stated that the current level of interest rates (in the range of 2-2. 25%) is close to neutral. Talking about the real interest rate, which corresponds to the state of the economy, in which GDP is at potential level and inflation at the target after the exhaustion of all cyclical shocks.

Fed not only affect the economy changes in interest rates, leading to growth of dollar’s rate due to an increase in the attractiveness of it denominated instruments, and also reduces your balance, which is from October 2017 fell by $ 270 billion Complex tasks in accordance with steps taken aims to “normalize” monetary policy, i.e. the creation of a situation in which financial markets and the US economy can move on their own, without artificial support from the fed in the form of quantitative easing. Gradually leaving the market, the fed eliminates more and the reasons for the charges that it “inflates” the bubble on the asset market.

Whether timing for tightening monetary policy in the United States, and was in this economic conditions? A brief analysis suggests that strong GDP growth, growth of industrial production volumes, the increase in domestic sales led to the ability of the business to generate cash flows independently, without additional liquidity the fed. In fact, it is an adequate response to fiscal incentives in the framework of tax reforms pushed the budget deficit to a level of 5% of GDP.

It should be stressed that this occurs at the peak of the economic cycle, when such fiscal stimulus can and do harm the U.S. economy is close to “overheating”, it approaches the limit of production capacity, unemployment is at half-century low (3.9 per cent).

What are the problems for Ukraine, as indeed for all countries, with developing markets?

For Ukraine tough times, it is the negative effect of the double action side of the dollar strengthened and by high interest rates. Next year Ukraine has to pay about $ 5.9 billion On external debt (repayment and maintenance). The problem can be not only a strengthening of the dollar against other currencies, but the rise in price of borrowing owing to the high rate of FRS.

Low rate of the Federal reserve determined small level of interest rates in world markets, which was a growth driver of the Ukrainian economy up to 2010. Termination of this factor had a negative impact on economic dynamics in Ukraine, a country with non-diversified commodity exports and a significantly narrowed in recent years, domestic market. The surplus money in the global markets could lead to new incentives, and if rates continue to remain at the current high level, the external impetus to the growth of the Ukrainian economy will be weak.

As noted in previous publications, the rising rates led to a slowdown in China’s economy. The consequence may be the reduction of export of Ukrainian agricultural products to China.

In the future, Ukraine and other emerging markets will continue to suffer from the indirect effects of monetary policy, growth in U.S. interest rates and strengthen the dollar — all this leads to a capital outflow (or deter the inflow of foreign investment) and aggravates the external debt service.

Analyzing trends, determine key players in the global economy, it is necessary to highlight the main problems for decision in the current economic climate is not very favorable for the Ukrainian economy. The problems we need to solve, to provide incentives to accelerate economic growth.

The existing habitual problem of low productivity of domestic enterprises due to low level of use in the industry of modern technology, needs to be solved in the near future.

The problem of investment. The investment climate suffers from a lack of solid property rights and legal protection of investments as well as providing a comprehensive preferences for foreign investors.

The problem of internal reserves. The problem of domestic savings due to political and legal instability for the protection of property rights. Organic market infrastructure, will determine the balance of interests of market actors, minimizing state interference in business processes. The problem is trust, which leads to a brief strategy of business and sometimes their lack of development. Implementation of the plan BEPS.

Structural reforms are fundamental. The structure of our economy needs to be more versatile than the export of agricultural production, mining and metallurgy “low added value”. The lack of adequate diversification of the economy and the overwhelming support of big business leads to the growth of the economy due to the concentration of production, not at the expense of competition. This state of Affairs is a precondition for inflation and may be a deterrent to foreign and domestic investment.

Recall that for a significant growth in demand for goods and services, paying consumers, the availability of material and labor resources in the General sense is the market that has to develop. The size of the domestic market are determined by the solvency of residents (enterprises, population, etc.). Therefore, an important aspect of development is the development of industries with high added value, which determines the resistance to global challenges and strong domestic demand.