2019 Asia Market Outlook
At the start of 2018, emerging markets had only priced two rate hikes into the market for the year. However, Fed policy has been more restrictive than markets expected, and both Asian equity, currency, and credit markets have suffered as a result. We believe we have reached a turning point in Fed policy which will likely prove supportive of Asia-Pacific currency, equity, and select credit markets, and will result in improved capital flows to those nations.
The CIO Perspective: Asian Markets will Benefit from Softer Fed Policy
Fed policy tends to impact Asia and emerging markets for a series of reasons. Certainly, the US is the largest trading partner for many nations in the region, and anything that slows down the world’s largest economy on the basis of nominal GDP can be troublesome for them. From the perspective of currency risk, a stronger dollar makes it more expensive to pay back US dollardenominated debt. This year, these challenges have been compounded by fears of a tariff war and the combative trade-related rhetoric launched by the US president.
However, midterm elections in the US, combined with softer US and global economies, may give the Fed reason to decelerate the pace of rate hikes and perhaps even pause after their hike in December. This would be a positive development for Asian equity, currency, and credit markets. In that context, this year’s sell-off in emerging Asia is an opportunity for investors who are able to weather the market volatility. Valuations, cheap relative to US and European markets at the start of 2018, are especially favorable given the market correction. Additionally, if the rise in US rates has peaked in the intermediate term, we should expect US investors to renew their search for short duration yield. The rates offered by hedged direct lending strategies in Asia look particularly attractive.