Local markets brace for Fed rate hikes

INVESTORS are bracing for the start of rate increases by the US Federal Reserve in the middle of December, which may lead to further market volatility.

In a research note dated Nov. 27 titled “Impact of a Fed Hike,” Citigroup said the US Fed would likely start raising interest rates during its December 15-16 meeting and bring its targeted fund rate from near-zero level to 1 percent by end-2016 and 1.5 percent by end-2017.

Usually, a Fed rate hike causes the US dollar to weaken, treasury yields to rise and global equities to wobble before they eventually recover.

Citi suggested: “The global equity market should shrug off this rate hike; there may be some short-term volatility, as there has been in the past, but we would buy into that weakness.”

In the case of the Philippines, BPI Securities chief executive Michaelangelo Oyson said the negative effect from the US Fed lift-off could negate the boost from the upcoming presidential elections.

Higher interest rates in the US tend to cause local rates to rise as well. Higher interest rates, in turn, weaken consumers’ spending appetite.

Nonetheless, Oyson sees local economic growth being sustained at over 6 percent as government ramps up spending ahead of the elections.

First Metro Investment Corp. and University of Asia and the Pacific said in their own research note that heightened volatility may be expected during the run-up toward the US Fed meeting.

“Nevertheless, we continue to be constructive on Philippine equities in the next 12 months as economic and earnings growth are projected to be brighter,” it said.