The US Federal Reserve used its recent policy meeting to surprise markets by hinting that rate increases might begin earlier than expected, in 2023 rather than in 2024. The Fed has also indicated that it is growing more optimistic about American economic growth and employment conditions. These comments prompted financial markets to rethink their expectations of monetary policy and liquidity, and the result was a sharp sell-off in emerging Asian markets as investors remembered how the former Fed chief Ben Bernanke’s similar hints in 2013 caused the “taper tantrums” which rocked Asian equity and currency markets. Although markets have stabilised since then, they remain nervous.
Tighter American monetary policy could be a threat to emerging Asian markets and economies, going by previous experience. However, there are four good reasons why emerging Asia is better-positioned today to deal with the likely turbulence in markets than in 2013.
The first reason is that, unlike its downbeat condition in 2013, we believe that the global economic cycle is on the cusp of accelerating as the pandemic’s worst effects ease, and generating an export boom for Asia. Second, there is less reason than in 2013 to expect a prolonged sequence of rate increases in the US or elsewhere: therefore, easy liquidity conditions will be maintained and rates remain at ultra-low levels for years. Third, better fundamentals have also strengthened emerging Asian markets’ resilience to financial turbulence. Finally, we also believe that risks in Asia, while real, are turning out to be more benign than many had feared, despite worries about US-China ties as well as protectionism.
