The end of ‘quantitative easing’ in Japan, which began on March 8th is likely to prove to be a very significant event, with important ramifications for global financial markets. Those markets most vulnerable to this significant policy change are trades based on ‘carry’ and markets that have performed well over the past few years.

Asian Bond Fund Quantitative Easing

The four economies of Brazil, Russia India, China are often referred to collectively by their initial letters – ‘BRIC’. The term ‘BRIC’ was first coined by Jim O’Neill at Goldman Sachs in 2001 who argued that these countries had enormous economic potential and could become four of the most dominant economies in the world by 2050. Having realised that the ‘BRIC’ economies offered great potential for investors, many pension funds, hedge funds and mutual funds have invested heavily in emerging market equity and debt funds. The ‘BRIC’ story is predominantly an Asian one, but the only Asian country in the JP Morgan EMBI+ is the Philippines which has a weight of less than 10% in the index. Latin America represents almost 60% of the EMBI+. Thus, investors allocating to emerging market debt have invested heavily in Latin America instead of investing in Asia. This is the exact opposite of the conclusion that the Goldman’s analysis would suggest. The Asian CHIKS are the countries of China, Hong Kong, India, Korea and Singapore, which are likely to provide investors with the greatest opportunites over the next decade.

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A pile of BRICs or Asian CHIKS?