A higher-rate world is still coming

THE post-global financial crisis stock market rally in developed economies continued yesterday with the announcement by the US Federal Reserve to begin tapering its massive monetary stimulus programme. After five years of uncertainty, sentiment is finally turning positive. The Fed endorsement of positive views on the economy, along with an indication that interest rates might be kept low for longer, quelled the doubts of those who feared that higher interest rates will stifle a recovery.

But investors who have yet to jump into the five-year rally are justified in asking whether it is too late to enter. After all, stock market indices have more than doubled in the US and just about doubled in Singapore, all on relatively low liquidity. Meanwhile, the global economic recovery remains slow. Companies have not performed to earnings expectations. China is slowing down as it tries to shift its economy into one that is led by domestic consumption, rather than foreign investment. Current account deficit problems in Indonesia and India can also derail growth. Small businesses in Singapore are struggling to expand amid labour curbs and higher wage costs. Valuation metrics indicate that bubbles already exist in some areas like US technology or some property markets. Bad economic news or a macroeconomic shock can easily bring about a cor…