Britain hiked the interest rates last week. The US Fed and European Central Bank also signaled plans to rein in the stimulus. Yet, emerging market equities may come under pressure over the next few months
Emerging market liquidity is set to dial back as major central banks of developed economies adjust their policies to tackle the post-Covid era.
The Federal Reserve, last week, announced that it would be aggressive on tapering bond purchases and announced several rate hikes in 2022.
The Bank of England, on the other hand, hiked interest rates for the first time since the start of the pandemic, citing a strong labor market and the need to return inflation towards its 2% target.
The European Central Bank struck a more dovish tone, further cutting its pandemic-era bond-buying program but vowing to stay accommodative through 2022 and beyond.
This is in contrast to the Reserve Bank of India, which decided to keep its repo and reverse repo rate unchanged at the December policy meeting even though it expected inflationary pressure to persist in the near term.
Analysts feel many emerging markets will be in an increasingly difficult spot, going forward, as the current inflation shock could prove to be more permanent in developing economies than in the United States or Europe.
“If conditions persist, the US central bank may not only hike rates but also begin the process of allowing bonds that it holds to mature and/or selling bonds to reduce the size of its balance sheet. This scenario is not priced in the markets and will be a big scare for risk assets, especially in EMs, which have been a beneficiary of global liquidity,” says Arvind Chari, chief investment advisor, Quantum Advisors
Further, this gradual pullback in liquidity and easy money flow into EM equities will likely slow down their performance in 2022.
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