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Fed lift-off coming: Emerging markets gear up – Goldman Sachs

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Dec 15, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    FXStreet (Delhi) – Research Team at Goldman Sachs, suggests that after an unprecedented decade of near-zero rates, the prospect of monetary policy normalization raises real questions about the implications for economies and assets—all the more so given that inflation and growth expectations are somewhat lower than at the start of prior Fed rate-hiking cycles, while rate and equity valuations are at the higher end of their historical ranges.

    Key Quotes

    “Perhaps the greatest worry surrounding Fed liftoff is the implication for emerging market (EM) economies and assets given painful memories of EM debt crises in the wake of past US rate hikes. However, GS EM Senior Equity Strategist Caesar Maasry argues that EMs are generally better positioned for liftoff this time around in large part because they have effectively dealt with rising US rates since the 2013 “taper tantrum.”

    While the hiking cycle won’t help EM growth in the near term, Maasry still expects better fundamentals to support EM growth and returns in 2H16. (And as far as risks to that view, the CNY, not the Fed, may be the bigger one to watch.) Andrés Velasco, former Finance Minister of Chile and Professor at Columbia University notes that rising US rates could create a “perfect storm” for EMs. In particular, he worries about corporate exposures to dollar-denominated debt.

    Finally, with December liftoff both well-telegraphed and wellpriced at this point, we look ahead to the rate path and ask what—if anything—is not sufficiently priced heading into rate normalization? The answer according to GS Senior Rates Strategist Silvia Ardagna: inflation.”
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