No panic in emerging markets after rate hike: experts

By Andrew Jay Rosenbaum

ANKARA

There was no panic in emerging markets Thursday after the U.S. Federal Reserve raised interest rates late Wednesday.

Emerging market stocks were sharply higher Thursday.

Turkey's Borsa Istanbul opened higher early in the day. The Shanghai Composite Index was up 1.45 percent on Thursday morning. The MSCI Emerging Markets Index rose 0.5 percent. South Korea’s Kospi Index gained 0.2 percent. The FTSE Bursa Malaysia KLCI index improved 0.70 percent.

Investors saw the market reaction as justified, given the Fed’s dovish approach to future rate increases.

Investors had no reason to panic, commented Craig Erlam, senior market analyst with trading platform OANDA.

“I think Fed Chair Janet Yellen handled the situation very well which was reflected in how the market took everything into its stride in a relatively calm manner. The hike was communicated very effectively and the Fed acted in line with the expectations it had created, while ensuring that it got the message across that futures hikes will be gradual,” Erlam wrote in a note published on Thursday.

“The Fed’s move was pretty much priced in by markets ahead of time,” wrote Julian Jessop, an economist with Capital Economics in a note on Wednesday. Further, many emerging markets have reduced their debt, making them less vulnerable to the effects of a rate hike, he added.

In fact, the announcement that the U.S. federal funds rate will increase to 0.25 to 50 percent from 0 to 0.25 percent was seen as positive in many respects.

“The end of uncertainty about the Fed will help emerging markets,” commented Bora Tamer Yilmaz, an economist with Ziraat Securities in Istanbul, in a note published on Thursday. “Less policy uncertainty correlates to better risk taking.”

“The Fed may surprise us by staying dovish in the future. That's an upside potential for risk appetite,” Yilmaz wrote.

In fact, some analysts see the Fed’s announcement as a boon for emerging markets.

“A rate rise now is an opportunity for the Fed to remedy the negative international effects of its policies,” commented Lombard Street Research economist Diana Choyleva in a note published on Wednesday.

There is far less danger after that of an accelerated capital flight from emerging markets, Choyleva said. By removing the uncertainty from the global economy, the Fed permits investors to make risk versus return judgments about emerging markets, she explained.

Economist Mira Farka, a professor at California State University, also believes that the Fed has taken too long to make the move – it should have taken place a year ago.

“In fact, the Fed has been casting about for the last two years for any excuse to stay put on rates, and the delay has inflicted real costs in the world economy,” she said in an interview published on the university website on Tuesday.