Major IBs Warn of Possible Emerging Market Stock Correction Due to US Inflation

Countries with High Proportion of Interest Rate-Sensitive Tech Stocks like Taiwan
Rising Interest Rates Due to Inflation Increase Downward Pressure on Stock Prices

[Asia Economy Reporter Kim Eunbyeol] As concerns over inflation centered in the United States grow, major investment banks (IBs) have analyzed that emerging market stocks are more likely to undergo a correction. Although the minutes of the April Federal Open Market Committee (FOMC) meeting of the U.S. Federal Reserve (Fed) released last week reportedly raised the need for tapering (reduction of asset purchases), it was assessed that the possibility of financial market instability due to this is low.

According to the Foreign Exchange Operations Department of the Bank of Korea on the 24th in its 'International Financial Market Trends and Major Issues,' "As the U.S. consumer price inflation rate rises to the highest level since the financial crisis, some IBs pointed out the possibility of weakness in emerging market stocks due to inflation."

According to the Bank of Korea, UBS classified the recent price increases mainly due to rising energy prices as 'bad inflation,' and unlike 'good inflation,' where prices rise mainly in core inflation, it evaluated that emerging market stocks are more likely to be corrected.

Morgan Stanley forecasted that in countries with a high proportion of interest rate-sensitive technology stocks such as Taiwan, stock prices could face downward pressure due to valuation concerns if interest rates rise because of inflation. There was also an analysis that in China, if disposable income decreases due to inflation, consumption will slow down, leading to a slower economic recovery and a decline in stock prices.

Citigroup expressed the opinion that "the expansion of U.S. inflation causes a strengthening of the U.S. dollar, which leads to capital outflows mainly from emerging markets with slow vaccine distribution, causing stock price weakness."

Although the mention of tapering was assessed as earlier than expected, the possibility of financial instability arising from it was considered low. This is because the Fed has repeatedly expressed its intention to communicate sufficiently with the market to avoid a taper tantrum (tightening shock) like in 2013.

IBs mentioned that the mention of tapering at the FOMC was hawkish (favoring monetary tightening) and surprising, but most maintained the timing of tapering as before. Citigroup maintained its forecast that the Fed would announce tapering as early as July and reduce the scale of asset purchases from early next year.

Goldman Sachs also explained, "The timing of tapering will not be earlier than initially expected," adding, "It is estimated that about four of the members advocating tapering do not have voting rights, and the employment data released afterward fell significantly short of expectations."

However, some noted that if economic indicators such as employment data to be announced in early June show clear improvement, the possibility that early tapering could become the mainstream opinion within the Fed cannot be ruled out.

This content was produced with the assistance of AI translation services.