Fed Chair Janet Yellen’s announced moves towards a Fed rate hike may spell trouble for emerging market investments
A market commentary from TD Economics explains that with US Federal Reserve Chair Janet Yellen’s recently announcing moves towards raised interest rates, the motivation to invest in Asian emerging markets may be fading.
The piece explains that recent inflows into emerging Asian markets have been motivated by two root causes: “The first is the clear line of sight that global policy rates will be lower for ‘even’ longer. The second is that renewed confidence in China has boosted optimism in emerging Asian countries.”
The first main force, expectations of persistent low policy rates, is mainly motivated by statements from central banks. Low-to-negative policy rates – a paradigm of dovishness that the Fed has been part of for years – have depressed yields and inspired a hunt for better returns in global markets. However, the hawkish turn signaled by Yellen Friday may convince investors to reallocate their assets.
“[T]he third quarter is looking quite strong. We are tracking GDP this quarter at close to 3% and employment growth has bounced back strongly,” reads the commentary. “Outside of an unforeseen shock, this may be enough to tip the hand of the Fed to a hike in December and potentially even in September if the data proves better than expected. In this case, risk taking in emerging markets could be prone to a reversal.”
The second factor, confidence in China, is due to the fact that it has defied 2015 fears of an economic downturn. This has resulted in an improved outlook not just for China, but also trading partners for whom it is a critical export market. The piece attributes this to three factors: financial market stimulus provided by the People’s Bank of China (PBoC), depreciation in the renminbi, and investments in fixed assets.
China is not out of the woods yet, though. Its debt levels appear to be overextended, and it’s still doubtful whether the PBoC’s stimulus and the weakened renminbi would allow for further sustained strengthening of the overall economy.
Due to indications of a rate hike and doubts about China’s sustained performance, the commentary predicts that trouble could be brewing for emerging Asia. “In this scenario, money sitting in volatile EM assets may get a little flighty,” the piece concludes.
Related stories:
Yellen: We’re going to raise rates
Emerging markets see shrinking trade
The piece explains that recent inflows into emerging Asian markets have been motivated by two root causes: “The first is the clear line of sight that global policy rates will be lower for ‘even’ longer. The second is that renewed confidence in China has boosted optimism in emerging Asian countries.”
The first main force, expectations of persistent low policy rates, is mainly motivated by statements from central banks. Low-to-negative policy rates – a paradigm of dovishness that the Fed has been part of for years – have depressed yields and inspired a hunt for better returns in global markets. However, the hawkish turn signaled by Yellen Friday may convince investors to reallocate their assets.
“[T]he third quarter is looking quite strong. We are tracking GDP this quarter at close to 3% and employment growth has bounced back strongly,” reads the commentary. “Outside of an unforeseen shock, this may be enough to tip the hand of the Fed to a hike in December and potentially even in September if the data proves better than expected. In this case, risk taking in emerging markets could be prone to a reversal.”
The second factor, confidence in China, is due to the fact that it has defied 2015 fears of an economic downturn. This has resulted in an improved outlook not just for China, but also trading partners for whom it is a critical export market. The piece attributes this to three factors: financial market stimulus provided by the People’s Bank of China (PBoC), depreciation in the renminbi, and investments in fixed assets.
China is not out of the woods yet, though. Its debt levels appear to be overextended, and it’s still doubtful whether the PBoC’s stimulus and the weakened renminbi would allow for further sustained strengthening of the overall economy.
Due to indications of a rate hike and doubts about China’s sustained performance, the commentary predicts that trouble could be brewing for emerging Asia. “In this scenario, money sitting in volatile EM assets may get a little flighty,” the piece concludes.
Related stories:
Yellen: We’re going to raise rates
Emerging markets see shrinking trade
