The US Federal Reserve lifted interest rates overnight, and signalled there are more rises, to come, putting emerging market assets in the firing line.
Neil Birrell, chief investment officer at Premier, said the decision to hike interest rates was not a surprise and so the impact on developed equity and bond markets will be limited.
But policy makers said they expect to raise rates twice more this year, which is faster than was previously expected.
Mr Birrell said the Federal Reserve has taken the decision to focus on US economic issues, rather than the impact of the rate rise decision on the rest of the world economy.
He said emerging markets are likely to suffer because many companies and countries in those economies borrow in dollars, so higher interest rates mean higher borrowing costs.
This leaves less capital available for investment by companies or for wage rises, which reduces the level of demand in the economy.
Emerging markets also suffer because when US interest rates rise, the income available from the lowest risk asset in global markets, US government bonds, rises, meaning investors have less incentive to buy risky assets such as those in emerging markets, to achieve a higher return.
Richard Carter, head of fixed income research at Quilter Cheviot, said the US economy is “firing on all cylinders” and a rate rise was needed to prevent the economy overheating.
David.Thorpe@ft.com
