Investors have sleepless nights as central bankers meet

Investors should note that the crucial two-day meeting of the US Federal Reserve that began on December 14 will be closely watched for meaningful clues on rate hikes and the bond repurchase program. Apart from the Fed, several other central banks such as the European Central Bank and the Bank of England are also meeting this week. Against the backdrop of increased inflation, the US Fed’s updated forecast for economic growth and interest rates could point to a sharp rise in interest rates. Historically, the US Fed sets the tone for decisions on interest rates, so a change in stance by the Fed would mean others would follow suit. No wonder global investors are sleeping.

According to the survey report, global fund managers are expecting an average of two interest rate hikes by the US Federal Reserve in 2022. The report pointed out that 49% of those surveyed expect two hikes in 2022, while 23% expect one, and 17% expect three. Fearing rapid rate hikes, fund managers have increased their cash allocation from 4.7% in November to 5.1% in December.

But some market experts believe an early end to the Fed’s asset purchase program is a bigger risk for stocks than a rate hike.

“Even if the Fed starts raising rates, say two-three times in the next year, around 50-75 basis points, it will still be at a historically low level. I think the biggest concern is closing the liquidity tap. Stock market sentiment will be impacted faster than expected,” said Sahil Kapoor, head, products and market strategy, DSP Investment Managers. A basis point is one hundredth of a percentage point.

“The price of the two rate hikes has already been imposed; Therefore, the amount of tapering is important here. The Fed is expected to begin with a reduction of $30 billion in asset purchases. If his remarks point to more than this, it is a setback for equities, as access to cheap funds was instrumental in driving the rally of the global market at the peak of the pandemic,” said a fund manager with a domestic asset base. The management company said on condition of anonymity. The repercussions will be felt in the form of foreign institutional outflows and a stronger dollar, both of which do not bode well for emerging market equities, he added.

Meanwhile, on average the US Fed expects the tapering to complete by April 2022, according to a survey conducted by BofA. But some others have warned that it may be earlier than that. For example, Ian Shepherdson, chief economist at Pantheon Macroeconomics, expects the US Fed to complete asset purchases by the end of March at the latest. In a November 15 report, Shepherdson said, “The exact structure of the new plans is uncertain, but we anticipate that they will stick to their current plan for a $90 billion purchase this month, then slow down from their current plans.” Will double that to $15 billion per month.”

All this is expected to impact the valuation of stocks, which are by no means cheap. In fact, at nearly 20 times the one-year forward price-to-earnings, India is trading a premium valuation to most of its Asian peers.

“As far as valuations in the Indian and US markets are concerned, we think they are subdued and should consider favorable conditions such as lower interest rates and heavy liquidity,” Kapoor said.