The US Federal Reserve is expected to raise interest rates by the end of 2015, but such a move is unlikely to have a huge impact on emerging markets, a fund expert said.
People are afraid that a Fed rate hike would lead to a sharp rise in the yield curve in the United States, and a bigger rise in emerging markets would follow, resulting in inflation, said Simon Fasdal, head of fixed income trading at Saxo Bank.
“But I think the Fed thing is all exaggerated,” Fasdal said. “Inflation is not a problem, and they will not hurt the yield curve as I see it.”
“We are now having more or less a cap on the oil market because we have shale production and so many other energy sources … I don’t see inflation on a global scale will be a problem,” he said.
Fasdal also said that bonds and currencies in emerging markets plunged when then Fed chairman Ben Bernanke first revealed plans to taper the central bank’s stimulus program in June last year, but the market has since absorbed the news.
“Excessive liquidity, especially in Latin America and in some Asia bonds, was washed out and we got a much healthier relationship between risk and valuation,” he said.
The banker said 2014 is a lost year for equities, and investors are encouraged to diversify their portfolio with emerging market bonds as the hedging function of bonds has been effective all the time.
In fact, emerging market bonds have been performing well this year compared with the situation on a global scale, he said.
The Dow Jones Industrial Average is now below its level in January 2014, contrary to market expectations. The US 10-year yield stands at only 2.09 percent, although the expectation for the year was above 3 percent.
Emerging market currencies have also been weakening since summer.
All this has resulted from a bowl of risk factors including the Ukraine crisis and the advance of Islamist militants in the Middle East, he said.
The Ebola scare as well as slowing growth in the global economy, including China, also exert downside pressure, Fasdal added.
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