Funds have started flowing back into emerging markets as global interest rates peak in most parts of the world. The global economy is slowing as seen in shrinking exports and decelerating growth in manufacturing.
The US economy, however, remains solid given its strong labour market with rising wages continuing to drive household spending.
The Fed meeting last week not only showed signs of pausing rate hikes for now, but also indicated that the Fed is prepared to introduce easing measures should the economic downturn be revisited. Balance sheet reduction could be slower than the previously planned US$50 billion a month.
The Fed’s bias in holding more shorterterm bonds will pave the way for an “operation twist” in the future.
It launched “operation twist” in 2011 to buy longerterm bonds and sell shorterterm bonds. This was an effort to lower longerterm interest rates to stimulate loans for housing and project investments.
We believe emerging markets will have more upside from the current levels, particularly Chinese stocks. For the global sectors, we prefer REITs.