manuel sanchez : the changing tide of financial markets remarks by mr manuel sanchez, deputy governor of the bank of mexico, at the latin america & caribbean government funds roundtable, mexico city, 5 december 2014. * * * it is an honor to speak at the close of this government funds roundtable, which has brought so many important international investors together. this seminar has provided us with insightful ideas on the progress made and challenges confronted by the government fund community in protecting and expanding capital. i would like to organize my comments as follows, speaking first about the trade - offs investors may face as monetary policy normalization in advanced countries evolves. second, i would like to examine the financial scenario from the point of view of authorities in emerging markets. finally, i would like to touch briefly on the mexican economy. as usual, my remarks are entirely my own and do not necessarily reflect the views of the bank of mexico or its governing board. investors amid u. s. monetary normalization it is hardly an exaggeration to say that today ’ s investment environment is unusually complex. fund managers must factor in very low interest rates, many sovereign and corporate bond spreads at historically minimum levels relative to u. s. treasuries, and possibly stretched stock market valuations. generating continued profits in such a context is by nature difficult and potential upside in both fixed - income and equity markets could be limited. muddying the waters, the u. s. federal reserve will likely begin to reduce stimulus in the near future. indeed, as monetary policy normalization in the united states has drawn nearer, volatility in international financial markets has increased. uncertainty on the pace of normalization still looms. given recent forecasts and certain statements made by members of the federal open market committee, an eventual u. s. rate hike could come earlier than many market participants anticipate. furthermore, exactly how markets will react to policy news as it arrives cannot be predicted. in the last few years, most central banks and institutional investors have diversified their portfolios to enhance expected returns or to improve risk - return profiles. many of them have invested in unconventional currencies or in less liquid and lower - rated fixed - income assets, such as mortgage, corporate, or emerging market bonds, among other types of assets. some sovereign wealth funds have pursued more aggressive strategies, engaging in realsector asset purchases, such as infrastructure, commodities, real estate and equity. the overall results until now have been acceptable.

united states. as central banks in these regions are navigating unchartered waters, the consequences are impossible to predict. meanwhile, portfolios have been adjusted away from emerging markets, with lower capital inflows and even outflows in some cases. asset prices, at the same time, including those of emerging market bonds and currencies, have seen downward pressure. 4 also, spikes in financial volatility have hit amid geopolitical jitters, including fears over brexit. these developments reflect tensions and headwinds against emerging markets, testing the strength of their fundamentals. in mexico, the unprecedented shrinkage of the oil balance has resulted in a larger current account deficit. this gap still remains, however, only slightly below 3 percent of gdp. for an econometric estimation of the effects of u. s. manufacturing production and the bilateral real exchange rate on mexico ’ s manufacturing exports to that country, see banco de mexico ( 2016 ). quarterly report october – december 2015, box 1. analysts ’ estimates for gdp in latin america and mexico are, respectively, – 0. 6 and 2. 4 percent in 2016, and 2. 0 and 2. 8 percent in 2017. see consensus economics inc. ( 2016 ). “ latin american consensus forecasts, ” may. for an online progress report of mexico ’ s structural reforms, see presidencia de la republica, reformas en accion, http : / / reformas. gob. mx /. see koepke, r. and farnham, s. ( 2016 ). “ may 2016 em portfolio flows tracker, ” institute of international finance, june. bis central bankers ’ speeches the enlargement of the current account deficit has caught the attention of many observers, perhaps not so much because of the sheer magnitude of the total balance, but likely because of the underlying trends, which may eventually trigger external financing restrictions. this type of concern should not be neglected, and must be properly assessed. one fact is precisely the weakening of the oil trade balance, reflecting lower extraction and a significant deterioration of the oil terms of trade. a second is that the other component, the nonoil balance, has been improving, partly aided by real exchange rate depreciation. nevertheless, this performance has not been sufficient to completely offset trends in the oil balance. in a word, recent less favorable balance - of - payments developments reflect mexico ’ s oil situation. to preclude the