The Fed is going to under-promise and over-deliver on rate hikes, which will underpin an ongoing bear market in emerging market (EM) equities.
This is according to a speaker at Citywire Zurich event Harry Colvin, senior market strategist at Longview Economics, who said the hunt for yield that pushed investors into emerging markets in 2000-2001 is starting to reverse.
The economist, whose team is currently underweight EM equities, said the outperformance of the region was supported by cheap money flowing in from the developed world, which enhanced credit and investment growth.
He added that as a result of inflows of cheap capital, the reserves of EM central banks and commercial banks grew significantly, setting the scene for credit booms, asset price bubbles and current account deficits.
Meanwhile, Zurich investors attending the Citywire forum opted for EM bonds (29%) along with high yield bonds (29%), when asked which fixed income asset class they find attractive over the next six months.
In this video, Colvin also discusses where to invest as the US economy nears the end of the cycle.