If there is a rate hike, how will Emerging Markets be affected?

The rate hike has been the talk of the town for a while. The Feds were being blamed for not raising interest rates earlier. Have it come across what is the effect of such interest rate hike on the economy and society?

It was studied that rate hikes are meant to control the extent of inflation. The Fed looks out for measures such as Gross Domestic Product (GDP) and Consumer Price Index (CPI) to determine if interest rates should be altered.

Scenario 1: Inflation (Healthy Economy)
Inflation happens when the economy or consumers' spending have been growing. In order to limit the price increases of products and services, the Feds will first decide if the time is right to increase interest rates. Other than slowing down inflation, a rate hike will make it more expensive for companies and consumers to take loans and in turn reduces borrowings and spending. As a result, demand drops leading to the fall in inflation (product prices then have to be reduced in order to maintain consumers' demand). Companies will make fewer investments due to lower borrowing and also make lesser revenue due to lower demand of goods. This will generally lead to the drop in stock prices. However, this does not entirely apply to all industries. Healthcare services and consumer products (Such as Unilever; consumer defensive) may remain resilient because the general public will continue to patronize such services. It is however a double edged sword for the banking sector. Increased interest rates on loans can spur banks' earnings but at the same time discourage borrowings. It will come down to which extent of change is more drastic. 

Comments: The recent concerns of the public is that US economy have been strong for too long , with limited control on inflation. There is a questioning if a bubble was formed. 

Scenario 2: Deflation (Recession) 
On the contrary, a country which is in recession would want to increase its citizens' spending and demand (as well as overseas spending by exporting goods to them). A rate reduction will make loans cheaper in terms of lower interest rates. Companies and consumers can then afford to take loans and spend without waiting to save up. Below will be the overall effect in order to promote inflation. The heightened spending will help recover the recession while bringing back inflation. Stock prices will start climbing again from their recession lows. After years of inflation, we will be back at Scenario 1. 

↓ Interest Rates =↓ Borrowing Costs 

=↑Loans taken= ↑Spending =↑Inflation / ↓Deflation

 Comments: During a recession, a rate reduction move might be one to look out for as the beginning of an economy turnaround. 

The US economy has been in inflation since 2015 while Singapore had recently escaped a technical recession in Q3 2016. The Monetary Authority of Singapore (MAS) has already started reducing the speed of appreciation of the Singapore currency in order to encourage economic growth. 

While the December rate hike looks like one many is now anticipating, it is usually bad for REITS (though not definitely). This also turns us to today’s performance of the Singapore REITS. It was one of the most badly hit sector today with about 2% to 3% drop in prices while the others suffered lesser pain. It is getting uncertain for us to enter the emerging market now despite the good discount it is offering.  The unknown policies and plans ahead might not necessary favor Asia's economy, especially if a trade war is declared. I personally felt extremely tempted to load up some blue chips today but it was a tough call. It is often at opportunities like this where fear strikes us. And as we look back at hindsight, we then make comments with “should haves”, “would haves” and “could haves”.