New Fed chair gets thumbs up from Asia investors
US president Donald Trump's appointment Jerome Powell as the next chairman of the Federal Reserve indicates that the country's monetary policy is likely to remain on its current trajectory for the time being. That's good news for Asia, which is benefiting from the country's low rates and relatively strong economy, say investment experts.
“Powell represents the greatest level of continuity from Chair Yellen,” David Lafferty, senior vice president and chief market strategist at Natixis Global Asset Management, told AsianInvestor, referring to incumbent chair Janet Yellen, who Trump decided not to reconfirm on Thursday (November 2).
A maintainance of Yellen's policies is likely to mean the Fed maintains a slow, data-dependent increase to the federal funds rate and a concurrent gradual reduction in its balance sheet, Lafferty explained.
Tuan Huynh, Deutsche Bank Wealth Management chief investment officer and head of wealth discretionary, Asia Pacific (picture left), noted that Powell, who sits on the Federal Reserve's board of governors, is considered a monetary policy centrist or a dove, similar to Yellen.
“I think he has the ambition then,” he told AsianInvestor, “to continue with the current strategy.”
The Fed has increased rates four times since December 2015, raising the target rate by 25 basis points in each instance. In September, the Federal Open Market Committee announced that it would begin unwinding its $4.5 trillion balance sheet by $10 billion a month starting in October, gradually increasing over the next year to $50 billion a month.
Trump’s appointment of Powell bodes well for Asian markets due to the strengthening of the US economy, as well as the pace of earnings growth in the former.
“Asia will benefit from a stronger US economy through exports and healthier growth in developed markets,” PineBridge Investments' co-head of emerging markets fixed income and head of Asia ex-Japan fixed income Arthur Lau told AsianInvestor. With general growth outlook in Asia remaining strong, asset prices in the region should benefit over the medium term, he added.
Huynh was similarly bullish. “We’re expecting still Asian markets, in particular equity markets, to perform well the next 12 months,” he told told AsianInvestor, “and this is mainly also due to superior earnings growth.”
The MSCI AC Asia Pacific Index shows a 22.04% year-to-date return as of September 29, a figure that jumps to 27.17% in the MSCI AC Asia Pacific ex Japan Index.
Following in the foosteps
Powell follows in the footsteps of Yellen, who has been viewed by experts as having conducted herself well in her time as the head of the Fed.
Trump's decision prioritise continuity with his replacement pick was therefore welcomed, although it does raise the question why he needed to replace her at all. Yellen is the first Fed chair to not be renominated to the position by a new US president in 40 years.
“Yellen has done a masterful job of engineering the early stages of normalisation,” said Lafferty (pictured right). Her use of forward guidance to telegraph policy changes slowly, giving markets time to adjust, was critical in managing the introduction of four rate hikes and the balance sheet reduction without hampering the real economy, he explained.
“This is the best that you can say about any central banker,” Huynh said, “that they are acting in line with market expectations.”
Still, it may be too soon to fully evaluate Yellen’s term as Fed chair, Lafferty noted, due to large lags in the impact of monetary policy acts. Her policy patience may also run the risk of having created asset bubbles that pop in the future, he added, while the Fed has a ways to go in ensuring the US's long-term economic growth is ensured.
Huynh added that he has concerns about low US inflation, despite full employment. “They still don’t have a clue for this,” he said. “The economy is almost back to potential growth, and there are positive signs for further recovery,” he added, “but why is inflation not coming back —I think this is maybe one of their targets which have not been met yet.”
Erik Weisman, chief economist for MFS Investment Management, was more ambivalent about changes in Fed leadership. “In our view, regardless of who leads the Fed, the questions that monetary policy makers face will be the same,” he told AsianInvestor.
This includes concerns about maintaining sustained global and domestic growth, whether inflation will rise with further slack in the economy, and how monetary policy makers might avoid policy mistakes with global economic ramifications, Weisman said.
Another potential concern is Trump’s tax reform plans, according to Huynh, which may disrupt expectations of Powell’s Yellen-like approach. “Any major impact on the economy,” he said, “and then resulting in higher inflation expectations, could lead to maybe a stronger rate hiking cycle.”
Powell is set to become the first Fed chairman without an academic economics background since G. William Miller, who served as Fed chair from 1978 to 1979, and the first to come from an investment banking background, according to media reports.
He joined the Fed board of governors in 2012, after holding positions as visiting scholar at the Bipartisan Policy Center, partner at asset management firm The Carlyle Group, assistant secretary and undersecretary of the Treasury under President George H. W. Bush, and investment banker in New York, the Federal Reserve website said.
The lawyer by training was one of three main candidates for the chief central banker position, after Yellen's term ends in February 2018. Yellen was interested in a second term and Stanford University professor John Taylor was also seen as a candidate.
While a second term for Yellen would have been beneficial to Asian investors, Oliver Lee, investment director of the Asian equities team at Old Mutual Global Investors (pictured left), told AsianInvestor that a Taylor-led Fed would have likely quickened the pace of US rates, causing a stronger dollar that could have been a headwind for Asian equity sentiment.
Looking forward, Huynh is keeping an eye on economic conditions and monetary policies in Japan and Europe. “I think the market has been a little disappointed that the BOJ (Bank of Japan) wasn’t as aggressive as they could have been,” Huynh said, “so hence, we are not really super bullish on Japanese equities.”
“Inflation is also not picking up in Europe,” he said, “and the stronger euro this year hasn’t also helped.”
A Eurostat report released on October 31 showed Eurozone inflation was at 1.4% year-on-year in October, down from 1.5% in September and falling short of the European Central Bank’s stated goal of inflation below, but close to, 2%. The euro was up 6% in that same time period, according to ECB data.
In light of these concerns, Huynh is still positive about markets going into 2018, albeit with some reservations. “We might not expect the same return we are seeing this year, so definitely a bit more volatile,” he said, “but still with some upside potential.”
Huynh expects returns on global equities next year to be in the range of 6 to 8%. The MSCI World Index shows 16% returns year-to-date, as of September 29.