Investment Clock insights

Emerging economies and commodities pressured as Fed looks to hike in December

Trevor Greetham

13 November 2015

We are staying positive equities in the multi asset funds we manage but moving back to the deeper underweight in the UK, emerging markets and Asia ex Japan that we had before the late summer correction.

Our models have turned neutral on equities with sentiment indicators normalising. However, momentum is starting to turn positive again and we expect the Investment Clock model to become more supportive in coming months as US consumer-led growth picks up and inflation stays low.

The US Federal Reserve (Fed) looks likely to hike in December, setting the US on a divergent path from other central banks. Dollar strength is strongly associated with outperformance of Japan and underperformance of the emerging markets and rest of Asia.

What is unusual about this Fed tightening cycle is that emerging economies and commodities are already under downward pressure, whereas they are usually doing well when the world is strong enough for the Fed to hike. Dollar strength will most likely exacerbate commodity price weakness and it increases the cost of capital for emerging market countries reliant on portfolio inflows to finance their deficits.

Japan, on the other hand, imports commodities and exports consumer goods to the US and we expect a trend of outperformance to resume.

The value of your investment and the income from it is not guaranteed and can fall as well as rise. This article is for professional customers only. The views expressed are the author’s own and do not constitute investment advice.