Emerging market sell-off unlikely in case of US Fed hike: analysts

Though markets will perform in line with global benchmarks in the near-term, analysts expect downside to be limited from the current levels

It is now a consensus view that the US Federal Reserve (US Fed) will hike rates at its next policy meeting on December 15 ? 16. Even as the world gears up for the event, analysts say most financial markets are already factoring in a 25 basis point (bps) hike. Despite volatility, pre and post the Fed outcome, they rule out any massive sell-off in emerging market equities, especially India.

Global equity markets feared a similar situation when the US Fed announced the winding down of its third round of quantitative easing (QE3) back in 2013. The concerns, however, were short-lived.

Most equity markets post this period (December 2013 when the tapering plans were announced and October 2014 when the taper ended) did well, with the Indian benchmarks outperforming with a 30% rise during this period.

The Dow Jones Industrial Average (DJIA), S&P 500, FTSE, S&P BSE Sensex, Nifty 50, Shanghai Composite, Taiwan Index and Jakarta Composite moved up between 4.9% - 32% despite domestic and global headwinds.

Also Read: Fed's rate hike to favourably impact emerging markets: Mark Mobius

"In anticipation of the US Fed rate hike, we have seen around $80 billion being pulled out of the emerging markets in the last five - six months. We think that the rate hike has largely been factored in. If one goes back to the taper days, this is exactly what had happened before the event, and got normalised post the taper. Going forward, once the hike is out of the way, we expect the emerging market flows to stabilise rather than remain negative. The impact of a rate hike on emerging flows will be positive," suggests Vaibhav Sanghavi, managing director, Ambit Investment Advisors.

Siddarth Bhamre, head of research (equity derivatives and technical) at Angel Broking also says that the foreign institutional investors (FIIs) have been pulling out money from the cash market steadily since the last few months.

"I don't think that the US Fed rate hike will come as a surprise. Most investors would have aligned their global portfolios accordingly. I don't think that the emerging markets are on a crash course in case of a Fed rate hike," he says.

View on India

Though the markets will perform in line with global benchmarks in the near-term given the US Fed event, analysts say that the downside from the current levels appears limited. In case of a knee-jerk reaction, they expect the pull back to be equally swift though a lot would depend on the progress of the GST bill passage. Beyond that, the market direction will be determined by corporate earnings and the Budget session in February.

"Based on incremental data points received over the past one month, the expected downside in the event of a Fed rate hike (60 per cent probability of a rate hike) appears to be diminishing and the recent low of around 7700 on Nifty, in our view, is the near-term floor for Indian equity market," said said Ravi Sundar Muthukrishnan, senior vice president, co-head of research at ICICI Securities in a December 01, 2015 report co-authored with Vinod Karki, Ravin Kurwa and Anagha Deodhar.

"Our hypothesis is based on improving domestic conditions and fading sensitivity of Indian equities to FII selling," they add.

Bhamre expects the markets to remain in a range over the next few months given the lack of liquidity and positive triggers.

"It is unlikely that the Nifty 50 will cross 8,250 in the December F&O series, unless the Fed stays put. The index faces resistance at 8,100 levels and has support at 7,500 ? 7,550 levels," he adds.