After months of feverish economic analysis and nuanced scrutiny of every Federal Reserve utterance, the U.S. is finally on the brink of its first rate cut since the financial crisis. Emerging market investors are bracing for the impact.
While the market has fully priced in a quarter-point reduction, analyst estimates range from a 50-basis-point reduction to no change. Policy makers announce their decision at 2 p.m. Wednesday.
Many investors are optimistic lower borrowing costs will boost appetite for riskier assets, while others are concerned the Fed won’t meet the market’s very dovish expectations. Even if developing-nation assets initially rally, some analysts say this may not last long as the weak economic growth that is underlying the monetary easing come to the forefront.
Here are three ways leading investors are looking to play the various outcomes of tomorrow’s meeting.
Disappointment
Chris Diaz, a money manager at Janus Capital Management LLC in Denver, is “significantly underweight” in emerging-market assets ahead of the Fed decision. He expects the central bank to cut rates by 25 basis point and says markets are pricing more easing than warranted.
“I struggle to see how the Fed can meet or exceed the market’s dovish expectations,” Diaz said. “I would expect risk assets, including EM, to underperform risk-free assets.”
Diaz is also concerned about the global economy, which looks “pretty weak” outside the U.S. consumer space. He says weakness appears to be concentrated in trade and manufacturing, which is not good for developing nations. A dovish surprise could briefly provide some relief to those assets, but he says only a better growth outlook would make him more optimistic on emerging markets again.
Up Then Down
Many investors forecast a brief rally after a rate cut, before attention inevitably turns to sputtering global growth. Goldman Sachs Group Inc. is avoiding “naked long” positions in emerging markets as growth will probably keep slowing and says monetary easing won’t be enough to reverse that trend.