Close

My life as a Fed watcher

Asian markets spent May treading water. It was almost like swimming against the tide. Companies are earning money and making an effort, but not getting anywhere. Local investors can be quite active in Asia, and flows from China can have a major impact on the stock market. But it is foreign (read US) money that makes a difference and creates multiple expansion (higher valuations). This flow is largely governed by US interest rates and it is therefore important to understand what the Fed is expected to do.

In November, I wrote that after the presidential election Asia would gain ground and ride a seventh wave. There were large stimulus packages, the dollar weakened and capital sought out Asia.

The thinking was right, but the wave was short-lived. The stimulus packages brought with them an exchange that rose too fast, expanding commodity prices and higher producer prices and, with this, inflationary worries. Higher US bond yields meant that Asia sold off. The Fed is not worried and the message is that low interest rates will persist. However, the market is pricing in higher interest rates and tapering, with a roll-back of central bank purchases of assets in the form of bonds and shares.

The last time tapering was on the agenda was in 2013, after the support measures introduced following the financial crisis in 2008. As now, the stock market fell on concerns that the party was over and that the situation would be restored. Tapering. Once the measure to withdraw money from the market was introduced, no one cared. The stock markets in Asia rose again. The same thing will happen this time. Whatever the Fed says now, there will be austerity measures at the end of this year or next spring. The signal is this: when stimulus can be ended, the (US) economy will be back on its feet and that is good for the stock market.

In China, we are in a period of increased intervention and greater state control for multiple sectors. Internet and fintech companies have been fined for monopoly-like marketing methods. Alibaba’s and Tencent’s payment platforms face stricter regulatory requirements for their online micro-lending. China recently banned Bitcoin. That same week, the government launched its own digital currency that may compete with Antpay and Tenpay. This is about maintaining control and thus power and is important because this year the Communist Party is celebrating its centenary. Xi Jinping is strengthening his grip on power ahead of the “election” of China’s leaders in November 2022. During these periods of increased government influence and uncertainty, Chinese equities tend to be hesitant. With China’s dominance in the Asian capital markets, it becomes more of a challenge to create returns in the short term but this usually passes. The recipe here is long-termism and patience.

More about the fund

Asia

Carnegie Asia is for those who believe in the power of a young and increasingly well-educated population with high consumption needs. Nearly half the world’s population lives in Asia, and...

More info
Buy fund

More articles

China’s common prosperity initiative
Carnegie Asia

China’s common prosperity initiative

One threat to future growth is that China’s population is now shrinking, for the first time in forty years. China is approaching a Japan scenario, with an increasing proportion of...

Gunnar Påhlson 3 September 2021
The conclusion is that the Chinese government needs to strengthen its grip on power
Carnegie Asia

The conclusion is that the Chinese government needs to strengthen its grip on power

The Asian markets were up in June. Worry about inflation resulting from global central bank support has been a recurring theme this spring. The recent message from the US Fed...

Gunnar Påhlson 6 July 2021
The portfolio companies benefitting from transition
Carnegie Asia

The portfolio companies benefitting from transition

Asian markets fell back in April. Carnegie Asia fell 1.2 percent. We have previously written about attractive investment themes in Asia. Several of these are driven by a global need...

Gunnar Påhlson 7 May 2021