EMs to benefit from Fed pause

Emerging market equities are set to benefit from a US Federal Reserve pause, and could even withstand a gradual appreciation of the greenback, according to Natixis Investment Managers’ chief market strategist, David Lafferty.

Commenting on the status of the Fed, Lafferty said he believed the Fed was truly on hold waiting for additional data, and with that in mind, it is broadly supportive of emerging market equities.

As well, unless Europe falters more severely, Lafferty expected the US dollar to range-bound, and emerging markets could potentially withstand this gradual appreciation.

Natixis IM’s base case would be that inflation remains subdued, and the US economy stabilises or continues to gradually decelerate toward a longer run potential nearer two per cent real GDP.

“In the near term, this outlook is neither strong enough to justify a rate hike or weak enough to justify a rate hike,” he said.

Given this view, Lafferty said he estimated the year-end probabilities at a 25 per cent rate hike, 25 per cent rate cut, and 50 per cent unchanged.

“We aren’t expecting a resurgence in US growth that would justify a rate hike, but it is well within the possibilities,” he said.

According to data from FE Analytics, the Emerging Market Equities sector returned 2.41 per cent for the 12 months to 2 May this year, and the European Equities sector returned 2.33 per cent. While the yearly results don’t look too flash, both of these sectors have managed to rally in the six months to date, returning 13.19 per cent and 8.34 per cent.

Despite Brexit, European equities have rallied stronger in the three months to date, returning 10.09 per cent, while the Emerging Markets sector saw a slight drop to 6.05 per cent.

The North American Equities sector returned a whopping 18.90 per cent for the 12 months to date, but dropped to 10.18 per cent in the six months to date, and rose slightly to 12.03 per cent in the three months to date.

The chart below tracks the performance of the three global equity sectors for the 12 months to date.