Several studies have shown that every time the US Federal Reserve raised interest rates, the stock market benefited from it.
But few studies dealt on how an interest rate hike affects the transaction volume in the stock market.
I found that the impact of a rate hike on the transaction volume of mature equity markets was limited. However, the volume noticeably declined in emerging markets.
Amid this new environment, investors should get used to a “slow is fast” strategy by having a long-term vision.
While the United States ended its seven-year zero interest rate cycle, the monetary policies in Europe, Japan and emerging markets remain loose.
The market has yet to confirm that global liquidity will continue to be loose. When liquidity changes, market transactions will be affected.
The reason why I am much concerned about transaction volume is that in the past year, market players held divergent views about the outlook, thus creating huge transaction volume and market turmoil.
The average daily transaction volume of MSCI World Index rose 10.54 percent from a year ago while the index itself recorded a two-digit decrease.
Also, the Hang Seng Index’s average daily transaction volume rose 107.34 percent year on year since April, along with the robust bull market.
Liquidity pushed up the transaction volume in global equity markets in the past year.
According to the stock markets’ performance after the 2004 rate hike, the impact on mature markets was limited.
Three months after the interest rate rise, the transaction volume of the MSCI World Index was down 9.68 percent from a year ago, while transaction value rose 2.33 percent.
On the other hand, trading activities in emerging markets became weak. The transaction volume of the MSCI Asia ex-Japan Index decreased 21.02 percent while the value declined 12.7 percent.
The transaction volume for MSCI Latin America was down 21.71 percent while the growth rate of the transaction value slowed from 163.35 percent in half year before the rate rise to 30.73 percent.
The downward trend became clearer one year after the rate increase. MSCI Asia ex-Japan’s transaction volume dropped 14.83 percent and that for Latin America was down 42.15 percent.
The shrinking transaction volume implies that the market has reached a consensus about the outlook and the decrease in value represents market outflow as well as a decrease in liquidity.
But the slower pace of the transaction value decrease, compared with the volume decrease, means the price index is in an uptrend.
If investors had adopted a “buy and hold” strategy to reduce transaction costs, they could have received good returns in the previous interest rate rise cycle.
Overall, investors can continue holding assets in developed markets because they will be less volatile.
Investors may also buy assets in those growth markets to benefit from their long-term potential.
This article appeared in the Hong Kong Economic Journal on Dec. 21.
Translation by Myssie You
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