Fed 'Catching Up' With 50-Point Rate Cut: Fund Managers Expect Gains In Emerging Markets, Small Caps
The Federal Reserve’s recent 50 basis point rate cut marks a notable shift in monetary policy, with significant implications for both the U.S. economy and global markets.
Fund managers and strategists are weighing in on what this means for investors and what to expect next.
KraneShares: Fed's Rate Cut Signals A Cycle
Brendan Ahern, CIO of KraneShares, believes the Fed's 50 bps rate cut is the beginning of a larger easing cycle.
According to Ahern, “Another 50 basis point reduction is expected later this year, with an additional 100 basis points projected for 2025.”
While some fear the possibility of a mild recession, Ahern points out that the U.S. economy is still displaying resilience. "Unemployment remains low, inflation is easing, consumer spending is holding strong, and corporate profits are generally stable," he notes, suggesting the potential for a "soft landing" instead of a hard downturn.
Russell Investments: Softer Stance Could Boost Markets
Paul Eitelman, chief investment strategist at Russell Investments, shares a more tempered yet optimistic view, noting that the Fed’s focus is shifting from aggressive inflation control to stabilizing economic growth.
“This marked the start of a long-awaited easing cycle,” he said, adding that the Fed is aiming to prevent major damage to the labor market.
Eitelman expects the Fed to maintain a steady pace of cuts—25 bps at each meeting through 2025—to balance risks. Should this strategy succeed, sectors like real estate and small caps could benefit from lower rates and a stabilizing economy.
The Vanguard Real Estate ETF (NYSE:VNQ) and the SPDR Real Estate Select Sector ETF (NYSE:XLRE) are two of the most popular real estate equity tracking ETFs in the U.S.
On the small-cap front, the iShares Russell 2000 ETF (NYSE:IWM) and the iShares Russell 2000 Growth ETF (NYSE:IWO) are two popular ETFs tracking the Russell 2000 Index – a popular benchmark for small-cap equity in the U.S. The iShares Core S&P Small-Cap ETF (NYSE:IJR) and the Vanguard Small Cap ETF (NYSE:VB) are two other popular small-cap equity-tracking ETFs.
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WisdomTree’s Senior Economist: “I Am Surprised"
WisdomTree senior economist Professor Jeremy Siegel offered a candid take, expressing surprise at the Fed's bold move. “I’ll have to say, I am surprised. I was saying of course I wanted 50, you know I even wanted more, but I didn’t think he was going to do it.”
Siegel’s analysis also highlights the Fed's response to catching up with inflation control. "They realize that they were a bit behind the curve and now they are catching up," he said.
Siegel believes the rate cuts lower the probability of a recession, helping sustain economic strength.
Emerging Markets: A Beneficiary Of Lower Rates?
KraneShares' Ahern also highlights the potential boost for emerging markets. A weaker U.S. dollar resulting from lower rates could “strengthen emerging market currencies,” and increased capital inflows may follow. Investors in the iShares Core MSCI Emerging Markets ETF (NYSE:IEMG) and the Vanguard FTSE Emerging Markets ETF (NYSE:VWO) are well-positioned to benefit from the strengthening of emerging market equities.
Chinese assets, in particular, are attracting global investors as they trade at low valuations. Investors in the iShares MSCI China ETF (NYSE:MCHI) and the KraneShares CSI China Internet ETF (NYSE:KWEB) are positioned to benefit from any increase in fund flows towards Chinese equities.
Ahern advises closely watching both U.S. policy shifts and China's economic recovery for potential opportunities in this space.
While the Fed's aggressive 50 bps cut has caught many by surprise, fund managers and strategists agree it may provide much-needed relief to financial markets, with growth sectors and emerging markets standing to benefit from the shift.
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