Tapering is just postponed. Just 24 hours ago, all eyes were waiting for the US Fed announcement on whether the Fed will announce the reduction in their asset purchase program which could lead to high volatility across the world financial markets. The Fed has announced that it will look at this sometime in December.While the market has been expecting the central bank to begin the reduction of its quantitative easing (QE), it seems an elevated unemployment rate,fiscal policy uncertainty and rising mortgage rates have persuaded the Federal Reserve to maintain purchases for the time being. Chairman Ben Bernanke continues to stress the importance of data in determining future policy path and does not rule out QE tapering later in the year.
Immediate market reaction is “risk on” with equities, fixed income and gold rallying. Emerging markets with strong US trade links have already benefited and we expect this advantage to persist.
In the recent weeks, many foreign investors have made bargain hunting on emerging market equities. flows into emerging markets will continue for the time being.
We see that most Indian investors are typically home biased. Some degree of diversification will help to reduce the volatility. Expect the degree of volatility to be back in December as the markets again discuss the word tapering!