Weekly Buzz: 🌏 When the Fed cuts, the world takes notice

5 minute read

It's said that when the US sneezes, the world catches a cold. That also rings true when it comes to interest rates. The Federal Reserve's big cut has sparked a global easing wave, with central banks worldwide now following suit.

The global easing cycle kicks off

Emerging Asia has been particularly responsive to this trend. With inflation running lower than global averages, the region's central banks have more flexibility to act. The Philippines, Thailand, Indonesia, and South Korea have all moved to reduce their rates. Meanwhile, China went a step further, combining its cuts with broader economic stimulus.

Some are taking a more measured approach. India and Malaysia are maintaining a neutral stance, backed by their economies' solid growth. And in Europe, central banks are planning fewer cuts. It's a delicate balance: trim rates too quickly and inflation could surge again, but wait too long and growth might slow.

What’s the takeaway here?

This new global easing cycle could boost investor confidence, particularly in emerging markets. When interest rates fall, capital becomes more accessible, stimulating growth. Consider this an opportunity to review your portfolio’s geographic exposure. A well-diversified portfolio protects against risk and captures global growth, regardless of the macroeconomic cycle.

Take our General Investing portfolios for example – they give you access to markets worldwide, with allocations that adjust based on your selected risk level. Choose a moderate risk level (SRI 22%) and you'll get around 27% exposure to US equities, paired with 28% in international markets through ETFs covering emerging markets like India. If you're comfortable with taking on more risk, the SRI 36% portfolio increases your global equity exposure significantly – to about 46% in the US and 47% in international markets.

💡 Investors’ Corner: Why the markets aren't always rational (and what you can do about it)

In theory, stock prices should reflect all the information that’s out there. That would mean that shares are neither cheap nor expensive – everything is priced just right. But the markets aren’t perfect, and inefficiencies can creep in.

Consider when borrowing was cheap between 2009 and 2022. In that environment, investors started to take outsized risks and stock prices drifted from fundamentals as people placed bigger bets on anything promising decent returns.

And market inefficiencies can take many forms. In our hyper-connected world, where data flows 24/7 and prices can shift on a tweet, you might expect markets to be more efficient. But it can also have the opposite effect – constant noise and knee-jerk trading can actually amplify market inefficiencies.

While it might be tempting to try to profit from an irrational market, short-term strategies like momentum investing (our Simply Finance below covers this) are prone to sudden reversals. That's why focusing on the big picture makes sense: it looks past short-term inefficiencies and captures the market's overall upward trajectory over time.

These articles were written in collaboration with Finimize.

🎓 Simply Finance: Momentum investing

Momentum investing is a trading strategy based on the idea that assets that have performed well recently will continue to perform well in the future. Similar to a fashion trend, once a style gains popularity, people jump on board, driving demand.

Just as trends can fall out of fashion, momentum can quickly turn against investors when sentiment shifts. During the dot-com bubble many piled into tech stocks, only for their investments to crash when momentum reversed. It's a reminder that what's popular isn't necessarily what’s profitable in the long run.