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Emerging Markets Largely Unaffected by Fed Inaction

Major stock indexes across emerging markets actually traded higher in the immediate aftermath of the Federal Reserve’s decision to leave its benchmark interest rate at the record-low level of 0.25 percent. Evidence of this positive response was reflected in Excel Funds’ suite of investment products. The Excel Emerging Markets Fund traded up 1.24 percent for the week ending September 18 2015, while the Excel India and China funds returned +2.07 and +2.60 percent, respectively, over the same time frame. Furthermore, the PEG (price/earnings to growth) ratio shows that emerging markets (MSCI EM 0.81) remain inexpensive relative to developed markets (S&P 500 1.45) over the next twelve months1.

On Thursday evening, just shortly after the Federal Reserves announcement, Sankaran Naren, chief investment officer at ICICI Prudential Mutual Fund opined, “The U.S. Fed’s decision to not increase rates is positive for interest rates in India which are now expected to come down.” An ultra-low interest rate environment has largely been the driving force behind the U.S. recovery and Mr. Naren, a leading voice on the Indian economy and equity markets, hopes similar central bank policies employed by the RBI will help to spur further development in India. He concluded by saying, “[India equities] continue to be attractive for long term investments in the light of continuing redemptions in emerging markets.”

India and China remain on an upward trajectory primarily due to sound fundamentals. A healthy level of foreign exchange reserves, relatively low inflation compared to past years, strong consumer spending and sustainable growth are all layers of defence that allow both countries to sidestep macroeconomic events that are prone to shaking global markets. As external vulnerabilities have diminished, these two nations have become real sweet spots within the emerging markets sector.

1 Bloomberg Data as of 9/23/2014 in CAD

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