The U.S. stock market is one of the most affected by the Federal Reserve through its diverse tools in implementing monetary policy. However, only a few investors take regard the central bank’s influence on the fiscal markets worldwide through the U.S. dollar valuation. The global reserve currency is the greenback. This means that changes in its valuation could impact corporate balance sheets and global central banks’ foreign reserves, particularly those with borrowings denominated in dollar.
One of the effects of Fed rate hike to emerging markets is an increase in corporate defaults. Many firms in the rising market have obtained advantage from low U.S. interest rates by borrowing in dollars and compensating back with stronger local currencies. The Bank for International Settlements stated that there are bonds denominated in dollars worth $1.1 trillion in the third quarter last year, which was provided by emerging market companies that are not financial firms. The amount of bonds is higher than the 2008-end $509 billion and shows how low-interest rates caused the climb.
It would be more difficult to service debts when there are high U.S. interest rates. For instance, last year, we saw the currency of Brazil dropped to record lows against the American currency, causing firms to find it difficult to render revenue and repay U.S. dollar-denominated debt. Consequently, a wave of corporate defaults may appear, which could inflict the bond market and exchange-traded funds (ETFs) of emerging market.
Another effect of the rise in interest rates to the emerging market is lower foreign investments. With higher interest rates, more investors would be lured back to America, resulting in a capital outflow from rising markets. The lower foreign investment could put a halt on the growth of the economy in many nations that depend on such capitalization. Most fragile economies include Brazil, Turkey, Indonesia, India, and South Africa.
Emerging markets would also go through declining values of currency. This was proven by the preceding expectations of Federal Reserve’s hike, which resulted in decreases in emerging market currencies. While letting their currencies fall, their investments could be hurt despite assisting their exports.
When the greenback increases and debts become more pricey, emerging markets would have to suffer from lower credit rating. Higher borrowing costs would also be a hurdle for economies to invest for growth since it would be difficult to accumulate funding.
Commodities are also anticipated to be pulled downwards due to continued rise in the dollar. This is a pitfall for emerging markets for most of their commodities are sold in the greenback. They would get lower revenue, slower growth, and lower valuations.
The given facts showed the significant relationship of Federal Reserve stance on domestic and foreign markets. The changes in interest rates and dollar’s valuation proved significant for emerging markets future.
As far as the Philippine stock market is concerned, those who are invested in companies with healthy financial statements should continue to top up on their investments without setting aside their personal financial goals, investment horizon, and risk tolerance. Use fundamental analysis to identify companies with a sound financial record. Use technical analysis to identify your entry and exit price points.