ANALYSIS: Global rate cuts to boost emerging market flows – experts

A fresh round of global interest rate cuts is likely to be positive for emerging market assets as investors look for yield, according to a group of market experts.

Speaking at the FOW Trading Singapore event on Wednesday, a group of experts said the advent of the US Federal Reserve’s first rate cut in four years is a good signal for alternative markets, based on historical data.

Suil Sachdeva, treasury director at Singapore-based trading firm Safron, said the outlook is good across asset classes.

"If I look at the impact of the Fed cuts on bonds, historically since the 1980s there have been nine US cut cycles,” Sachdeva said. “In most of these cycles, the US dollar denominated bonds in emerging market countries have always outperformed the US corporate and high yield markets.

“In terms of equities and commodities, in addition to the rate cut there another very important parameter which is recession. The way these asset classes have historically flared up after the first cut is different whether there is one or not. For example, when you talk about equities when there is no recession global equities have rallied. US markets have given a return of around 14% on average over the last thirty years in a Fed rate cut cycle. When there is a recession following a Fed rate cut, there has been a plunge of around 7%.

“If we compare this to emerging economies, they have always outperformed because the investor capacity to take risks increases in both cases.”

Mike Duncan, senior investment officer at insurer SingLife, on an earlier panel sounded a more cautious tone. Duncan warned assumptions about further cuts could be disrupted by unexpected events.

“One of the things I’ve been hearing over the last couple of years is ‘this time it's different’, and I think the big impetus recently has been the 50 basis point cut,” he said. “That is a massive jump – something that generally happens when there is a problem with the economy or things like that… Generally I’d say watch out for volatility, and I’m still amazed by the way the market is absorbing political shocks such as the Ukraine war.”

Azila Abdul Aziz, chief executive and head of listed derivatives at Kenanga Futures, said moves in the Malaysian currency had provided an impetus for positioning from clients, as well as an extension of an agreement to use CME Group’s electronic trading system. This week, a historic rally after China unveiled a fresh stimulus package drove relative value-based positioning on the Bursa Malaysia Derivatives (BMD) market.

“What we have seen is our clients getting more active, looking at the value of Ringgit and also some Malaysian assets getting more attractive,” Abdul Aziz said. “In that context, we have seen a very good shift in terms of foreign participation in the Malaysian derivatives market made even more prominent after the extension of CME Globex beyond 2028.

“In terms of demographic, global liquidity that comprises banks, hedge funds and commodity trading advisors accounts for almost 65% of the activity on BMD, relative to 40% that we saw prior to Covid. The balance comes from domestic clients including commercial, … retail clients, high net worth and some corporate sectors in Malaysia.”

The chairman and chief executive of Yuanta Futures’ Hong Kong arm said early reaction to the moves had been positive across the region.

“Right now, the market reaction has been quite positive,” Eric Jen said. “Recently that has been true in Taiwan, Hong Kong, China or even Vietnam and Thailand. We are observing these funds flow into emerging markets, in Taiwan that is through the popularity of semiconductor futures, so we will see if that flow continues.”

Earlier in the day, the chief investment officer for South-east Asia and India in the Global Private Banking and Wealth business at HSBC said the likely cut cycle would be positive for risk assets including fixed income.