International | May 19 2006
By Rudi Filapek-Vandyck
Most economists seem to be discounting more rate hikes in the US, regardless whether Ben Bernanke and Co decide to go on hold at the next Federal Open Market Committee (FOMC) meeting.
According to JP Morgan’s chief equity strategist for Asia, Adrian Mowat, this should not be interpreted as bad news for the emerging markets in the region.
Higher US interest rates do not necessarily imply a subsequent collapse in global financial liquidity will follow, Mowat argues.
Currently, both OPEC and Asian current account surpluses are a main source for the global financial liquidity. Mowat points out these surpluses "are quickly recycled into the global financial system via debt repayment and stabilization funds".
He believes investors should revise their thinking and consider emerging markets as a "defensive asset class" instead. A view based upon the aforementioned current account surpluses plus strong corporate balance sheets in the region, robust economic growth, and sizable forex reserves.
JP Morgan forecasts the Fed Funds rate will climb to 6% by the end of 2007. This is at the top of current market expectations.
