Emerging markets have been under pressure for most part of 2015. The oft quoted argument which appears to hold together a lot of market sentiment is that a “tightening interest rate environment” has hit emerging markets(EMs). The possibility of a rate hike from the Fed and risk aversion from investors has often been given the highest priority in 2015. However, historically emerging markets and especially Asia has seen strong up thrusts only in times when US rates were headed higher (meaning bond markets were discounting future growth led inflation). It is entirely likely that in 2015 the markets have suffered not because of ‘fear of the Fed’ but because growth has been anaemic. With more easing to hit the markets, it quite possible that world growth may see a revival and take equity markets higher.
We believe that the declining interest rates in 2015 are indicative of a slow and lethargic world economy with absence of animal spirits. With most central banks convinced that outright bond purchases aka quantitative easing leads to stronger growth a fresh onslaught of liquidity is not far into the future. The European Central Bank has already hinted at expanding its quantitative easing programme announced in Q1 CY15
