adminAlmost two years ago, when the Fed did no more than suggest it might raise rates at some point in the not-too-distant future, emerging markets assets were roiled so badly that the incident has acquired its own alliterative name: the taper tantrum.
It raised a troubling prospect.
If just the idea of raising rates caused such a reaction, what would happen when the Fed actually went ahead and did it?
As we discovered last week: very little.
The markets had been expecting the rise for so long that pretty much every negative connotation, whether in equities, bonds or currencies, had long since been priced in.
Most markets went up, welcoming the clarity and seeing in the move a clear belief that the American economy is improving.
Emerging markets were scarcely hit at all. But the really weird thing is, they went up.
On the back of the Fed announcement, Japan’s Nikkei 225 rose 2,4 percent in early trading, and Australia’s S&P/ASX200 1,8 percent.
That’s not a great surprise.
They are developed economies responding to the sense that a fellow developed economy is recovering.
But Hong Kong’s Hang Seng Index went up 1,3 percent, Taiwan’s Taiex 1,1 percent, the Shanghai Composite 1,2 percent, the Philippines 1,9 percent, Malaysia 0,6 percent and Indonesia 1,3 percent.
This was not expected.
The reason emerging markets have long been considered vulnerable to a Fed rate rise is that, while the dollar has offered such a miserly interest rate for so long, investors have sought higher yielding assets, including, for example, emerging markets local currency bonds.
In some markets like Indonesia and Malaysia, more than 30 percent of these assets are in foreign hands.
The fear has been that, with US rates rising, that money would be pulled out and go back to the safety of US Treasury as soon as there is any yield to be gained from doing so.
Also, there is a fear that increasing dollar borrowing costs will hit emerging economies (some more than others) as emerging market currencies fall against the dollar, and so that developed economies would be better places to be invested anyway.
So why would emerging markets be up on the news? It’s really about certainty.
There are times it feels like economists have talked about nothing else for about five years.
Yes, a rising rate environment is difficult for emerging markets; but everyone knew it was coming, and at least there is the relief of knowing now.
Central banks in Asia and elsewhere can set policy accordingly, and try their best to hitch their own fortunes to those of an improving US economy. — Forbes.
Online Reporter