Date
28 July 2017
If the Federal Reserve decides to hike rates at this week's meeting, it will end the uncertainty in global financial markets and possibly set the stage for a rebound in equity prices in the last quarter, some observers say. Photo: Bloomberg
If the Federal Reserve decides to hike rates at this week's meeting, it will end the uncertainty in global financial markets and possibly set the stage for a rebound in equity prices in the last quarter, some observers say. Photo: Bloomberg

How investors can prepare for Fed tightening

Equity markets around the world have been very volatile in recent months due to uncertainties related to a US rate hike and the slide in China’s stock and currency values.

As of now, the China jitters have eased somewhat, and all eyes are on this week’s Fed meeting.

Markets may see some more volatility ahead of the Fed decision, but it can present an opportunity for investors to collect some good stocks.

US and European markets may stage a rally once the Fed uncertainty is removed.

If the Fed announces a 0.125 percent rate hike, markets may witness a staggering rebound as investors will believe the US central bank will adopt a fairly slow pace in raising its key rate.

Also, after the first rate increase, subsequent tightening moves will have less impact on the markets. 

As for Hong Kong, it is facing a more mixed picture overall.

There is a chance of the property bubble bursting in the coming years as some homebuyers may not be able to afford incremental mortgage costs after rate hikes.

Such people might be forced to sell their properties in the latter part of the rate increase cycle.

Housing prices may tumble even if two to three percent of the home buyers are forced to sell. As prices fall, it could prompt more selling, pushing prices down significantly. That could lead to financial crisis, economic recession and massive job cuts.

In the worst case, property prices may slide as much as 60 to 75 percent, and the city could struggle with a severe recession for 5 to 8 years. The unemployment rate may soar to 8 to 12 percent.

That is to say Hong Kong could face a similar situation as in the aftermath of the 1997 Asian financial crisis, when housing prices plunged and the economy contracted for many years.

In order to reduce potential losses, investors should hold back from the housing market and reduce holdings of property in their portfolios before the end of 2016.

Meanwhile, they could place small bets on stocks to diversify risks. But the shares must be sold between the first rate hike and late 2016 as the market could dive later if the property bubble bursts.

This article appeared in the Hong Kong Economic Journal on Sept. 15.

Translation by Julie Zhu

[Chinese version中文版]

– Contact us at english@hkej.com

JZ/JP/RC

Associate Professor, Division of Economics, School of Humanities and Social Sciences at Nanyang Technological University

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