7 Jan 2016
EM assets are likely to remain under pressure after Fed lift-off - BBH
FXStreet (Delhi) – Research Team at BBH, suggests that after the December lift-off, Fed tightening should continue in 2016 and they think EM assets are likely to remain under pressure, as markets are still in disagreement about the pace and the scale of the Fed tightening cycle.
Key Quotes
“The Fed Funds futures strip is still much more dovish than the Fed’s dot plot. Until the scope of Fed tightening becomes clearer, we think it will be hard for EM to get much traction.
Furthermore, soft commodity prices should keep pressure on many of the major EM exporters, including Brazil, Mexico, and Russia. And the renewed swoon in commodities will likely keep China concerns at the forefront, potentially weighing on wider EM sentiment. On the other hand, the prospects of more PBOC easing and perhaps more QE from the ECB and BOJ could help support global equities to some extent.
For now, we think investors should make use of any EM bounces to rebalance their portfolios. Whatever the pace and scope of Fed tightening is, we still believe it is very important for investors to continue focusing on the fundamentals and also on hedging out currency risk whenever feasible. Regionally, Latin America was the worst equity performer in 2015 (-31.6%), followed by EMEA (-22.2%) and then Asia (-11.5% YTD). We expect this trend to largely continue in 2016.”
Key Quotes
“The Fed Funds futures strip is still much more dovish than the Fed’s dot plot. Until the scope of Fed tightening becomes clearer, we think it will be hard for EM to get much traction.
Furthermore, soft commodity prices should keep pressure on many of the major EM exporters, including Brazil, Mexico, and Russia. And the renewed swoon in commodities will likely keep China concerns at the forefront, potentially weighing on wider EM sentiment. On the other hand, the prospects of more PBOC easing and perhaps more QE from the ECB and BOJ could help support global equities to some extent.
For now, we think investors should make use of any EM bounces to rebalance their portfolios. Whatever the pace and scope of Fed tightening is, we still believe it is very important for investors to continue focusing on the fundamentals and also on hedging out currency risk whenever feasible. Regionally, Latin America was the worst equity performer in 2015 (-31.6%), followed by EMEA (-22.2%) and then Asia (-11.5% YTD). We expect this trend to largely continue in 2016.”