Investors in Asia stocks and the world over are stepping into unfamiliar territory as they await perhaps the most anticipated US monetary policy decision in the Federal Reserve’s history.
After months of hand-wringing speculation, the Fed is poised to raise interest rates for the first time in almost a decade on Wednesday.
The expected move will be an unprecedented event for both the Fed and global markets: never before has the U.S. central bank faced the challenge of starting to unwind such a massive amount of stimulus, nor have rates in the United States been so low for so long.
Add to this the backdrop of relatively slower U.S growth than in past tightening cycles, and diverging Fed policy from other major central banks for the first time in over two decades, and you have a recipe for uncertainty and volatile asset markets.
“This period we’re in now, it isn’t like anything we’ve seen before because of all the moving parts,” said Kay Van-Petersen, global macro strategist at Saxo Capital Markets.
Stirring the investment pot further is China’s ascent as a major economic power, the outsized impact it has on financial markets as the world’s second-biggest economy and Chinese authorities’ tendency to intervene in their markets.
“The last few times we had a cycle with an interest rate hike in the U.S., nobody cared about China,” said Olivier D’Assier, Asia-Pacific managing director at risk management firm Axioma in Singapore.
“The data we have today is a bit noisy, and there’s so much regulatory intervention. That’s making people a bit nervous,” he said.
A case in point is the recent markets turmoil.
The MSCI Asia Pacific ex-Japan index tumbled 27 percent between an April high and a September trough, hurt in part by wild swings in Chinese stocks which in turn were influenced by Beijing’s botched attempts to stave off a collapse.
Even the 13 percent rally between then and October was primarily due to fading fears of China’s “hard landing,” said Sean Taylor, Asia-Pacific chief investment officer at Deutsche Asset & Wealth Management. The index has since surrendered most of those gains.
TO BUY OR SELL?
As China’s economy slows to its weakest pace in a quarter of a century and with a commodities rout rippling through financial markets, the Fed’s policy path will take on even more significance compared with previous cycles, analysts and fund managers say.
Although most market watchers predict a dovish Fed tone, expectations for regional stocks varied in a reflection of the uncertainty ahead.
Deutsche’s Taylor forecasts a “slow grind higher that could be faster than expected if the Fed language suggests the rate hike profile is lower for longer.”
Saxo’s Van-Petersen and Credit Suisse’s Sakthi Siva predict an initial rally, followed by renewed declines. Others like Timothy Moe, chief Asia-Pacific strategist at Goldman Sachs, expect the reverse.
When the Fed unexpectedly started raising rates in 1994 – the last time the U.S. central bank’s policy departed from other major central banks – Asia stocks slid 23 percent in the following year as U.S. borrowing costs increased 3 percentage points.
But back then, and over other past cycles, Asian currencies were more closely tied to the U.S. dollar, leading the region to import U.S. monetary policy, Moe said.
“This is the first time in modern history we’re seeing this difference in terms of the Asian cycle versus the U.S. cycle,” he said.
Central banks including Indonesia and Thailand are expected to ease policies in 2016, while the Bank of Japan is seen adding to its already massive stimulus and markets are counting on more easing from China.
U.S. growth in 2016, forecast at 2.4-2.5 percent, is also slower than during tightening cycles in the 1990s and early 2000s, when the world’s biggest economy was expanding at between 3.8 percent and 4.7 percent.
“History doesn’t help us much this time,” said Axioma’s D’Assier.
“We can speculate all we want but the fact is this time it is really different.”