Impacts of Fed’s decisions on emerging countries : an empirical analysis & investment solution

Amigo Weidemann, Simon ; Sterchi, Kurt (Dir.)

Mémoire de bachelor : Haute école de gestion de Genève, 2019 ; TDIBM 64.

On July 13th, 2019, the Fed decided to reduce its interest rates by 25 basis points. Its first since October 2008. A decision that could be thought of as a good thing for the emerging countries’ economies. Indeed, according to economic theories and history, they would benefit from a significant breath of fresh air. Legend has it that the Fed's will have a significant impact on emerging... More

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    Summary
    On July 13th, 2019, the Fed decided to reduce its interest rates by 25 basis points. Its first since October 2008. A decision that could be thought of as a good thing for the emerging countries’ economies. Indeed, according to economic theories and history, they would benefit from a significant breath of fresh air. Legend has it that the Fed's will have a significant impact on emerging countries, whether positive or negative. One could, therefore, question why did Argentina’s stock exchange – just a few weeks after the so-called beneficial decision of the US central bank – lose 48% in one trading session. The second-largest stock market sell-off in history after Sri Lanka’s civil war outbreak in 1989 (-61.7%). Obviously, the reasons for this Argentine air gap have endogenous roots, mostly political, but it is then interesting to investigate if the Fed’s decisions impact the emerging regions of the world. Do this relation still exists today? Have emerging countries emancipated themselves from the American game? And finally, depending on the answers, what would be the most efficient ways to invest in these regions, rationally and professionally. This paper, therefore, tries to demonstrate whether the impact on emerging markets of the Fed's decisions on rates still exists. More precisely, the approach here is to investigate the reactions of emerging currencies against the US dollar when interest rates vary. Through a statistical analysis over two periods (1997- 2008 and 2008-2019), using tools such as linear regression and correlation observation, and adding the time-lag component, interesting results emerge. Indeed, depending on the period chosen, they are diametrically opposed. As things stand, the study shows a causal relationship and a correlation between interest rate decisions and emerging currencies. However, the change in US rates does not explain all the variation in the analysed currencies. The economic cycle in which the analysis was made must also be considered, it is likely that the latter is a significant component. The addition of variables would improve the performed statistical model, thus allowing a better understanding of their behaviour and so facilitate the investment process. On this basis, adjusted with informed insights and experience of professionals, but also with the attempt to reduce cognitive biases to a minimum, this paper concludes with an investment solution. More specifically, a quantitative stock selection tool based on the mixed implementation of fundamental and technical analysis, which now shows encouraging results.