The US Federal Reserve (Fed) took its first step toward unwinding its unprecedented monetary stimulus. Beginning in January 2014, the Fed will reduce monthly asset purchases by $10 billion to $75 billion.1 The scale of the tapering was very much in line with market expectation. While timing may have surprised some investors, the market had already priced in the Fed’s imminent move. In addition, the Fed’s guidance -- interest rates staying at current level until both unemployment and inflation targets are met -- has also reassured investors that monetary policy won’t reverse anytime soon.
We believe the announcement of tapering near year end erases probably the largest uncertainty haunting global markets as they enter 2014.
Asian exporters should benefit
With almost 20% of Asian exports2 going to the US, the recovery of the US economy will undoubtedly provide a positive backdrop for Asian exporters in the medium term. In fact, recent Asian trade data are already showing signs of a revival of external demand — in October, China’s export growth rebounded strongly to 5.6% year over year from -0.3% the previous month.3 Moreover, the year-to-date depreciation of most Asian currencies induced by tapering fear should make Asian exports more competitive.
Liquidity may diminish but remains supportive
Asset-purchase tapering simply means a smaller net addition of assets to the Fed’s balance sheet, not an outright sale of assets. Liquidity within the global financial system should remain ample for emerging market assets. More importantly, Fed Chairman Ben Bernanke’s commitment to an extended period of low interest rate environment provides assurance of stable liquidity cost for Asian corporates, especially on short-term US dollar-denominated debt.
Intact fundamentals to weather tapering-induced volatilities
Changing expectations about timing of the Fed’s tapering have induced much volatility in both Asia ex-Japan equities and currencies in 2013. While we expect that further fine tuning of tapering may create more volatility for Asian equity and currency markets, it would be driven more by sentiment swings than changes in fundamentals.
Most Asian countries are now enjoying a much healthier level of foreign exchange reserves, and the systematic risk of foreign currency-denominated debt is significantly lower than before the Asian financial crisis. It’s also worth noting that the equity correction in select South Asian markets during mid-2013 priced in fear of capital outflows once tapering begins and has brought valuations to a more reasonable level.
Asian tapering outlook
To conclude, we’re confident that Asia as a region can withstand the impact of orderly tapering. On the corporate level, export names should continue to benefit from the gradual recovery of the developed economies, led by the US. Confirmation of the commencement of tapering, as well as well-managed interest rate guidance by the Fed, should reduce volatility in Asian equities as we celebrate the coming of 2014.
1 Source: US Federal Reserve, FOMC Statement, Dec. 18, 2013.
2 Source: Invesco, BNP Paribas Research, OECD, WTO, Oct. 22, 2013
3 Source: People’s Republic of China, Ministry of Commerce
About risk
The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.
The performance of an investment concentrated in issuers of a certain region or country is expected to be closely tied to conditions within that region and to be more volatile than more geographically diversified investments.
The dollar value of foreign investments will be affected by changes in the exchange rates between the dollar and the currencies in which those investments are traded.
The information provided is for educational purposes only and does not constitute a recommendation of the suitability of any investment strategy for a particular investor. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.
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