Global investors are bracing for potential turbulence as central banks in emerging economies are likely to raise interest rates in response to the US Federal Reserve's decision to hold rates steady at a two-decade high.
Nigel Green,CEO and founder of deVere Group,a prominent financial advisory firm,warns that the Fed's stance will pressure emerging markets like South Africa,India,and Mexico to tighten their own monetary policies.This move aims to combat currency depreciation,tame inflation,and manage capital flight risks,all while ensuring they can service external debt.
Green highlights the potential impact on global investors.Higher interest rates in emerging economies could translate to more attractive yields on government bonds issued by these countries.This could entice foreign investors seeking better returns,leading to increased demand for emerging-market bonds.Consequently,higher yields might also trigger capital outflows from developed markets as investors adjust their portfolios to capture the benefits of these emerging-market bonds.
The ripple effects extend to equity markets.Sectors like financials and utilities,which are typically sensitive to interest rates,are likely to benefit from higher rates due to increased profitability.Conversely,sectors reliant on debt financing,such as real estate and consumer discretionary,might face challenges as borrowing costs rise,potentially impacting their earnings and stock prices.These shifts can influence investor sentiment and risk appetite,potentially triggering fluctuations in equity markets beyond emerging economies.
Emerging market central banks raising rates will also impact currency markets.Green explains that higher rates would attract foreign capital inflows,leading to appreciation in local currencies.This,in turn,affects currency pairs globally.Changes in exchange rates between emerging-market currencies and major currencies like the US dollar can influence trade flows,corporate earnings,and cross-border investments.
Green adds another layer of complexity.Emerging markets are significant consumers and producers of commodities like oil,metals,and agricultural products.Higher interest rates could potentially dampen economic growth and demand for commodities in these markets,leading to lower prices.However,a stronger local currency resulting from higher rates might decrease the cost of imported commodities,easing inflationary pressures and bolstering consumer purchasing power.
With Federal Reserve officials,including Chair Jerome Powell,indicating they won't consider rate cuts until inflation shows a clear and sustained decline towards the 2% target,the focus now shifts to Fed Chair Powell's speech following the announcement.According to Green,a hawkish tone from Powell is expected,further pressuring emerging-market central banks to raise rates.