The region’s emerging markets are well positioned but facing headwinds
Asian countries should brace for three major challenges in the year ahead, according to Carlos Casanova, senior Asia economist at Swiss private bank UBP.
“We have rising Omicron cases. We have priced in slower growth in China at around 5%. And now, the Fed meeting minutes suggest that the pace of the tapering will be faster-than-expected,” he told CNBC, adding that those factors “pose a threat for the region as a whole.”
According to Casanova, despite the fact that Asia’s emerging markets are well positioned, they will be more impacted by these challenges, especially if the US regulator moves aggressively on the policy front.
“There will be a real rate compression between emerging markets in Asia and the US,” he said, explaining that it may lead to further outflows of bonds in the region, especially from economies that are more vulnerable.
It all depends on how the US Federal Reserve goes about normalizing its policy in the coming months, Casanova said. “What we are fighting to avoid is a situation, whereby, they are more proactive in reducing their balance sheet at the same time as they’re implementing three rate hikes in 2022.”
The US central bank signaled earlier it was ready to tighten monetary policy more aggressively than previously expected. It has indicated that it may start raising interest rates, dial back on its bond-buying program, and engage in high-level discussions about reducing holdings of Treasurys and mortgage-backed securities.
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