Globally diversified equities remain attractive amid yet another Fed pause: analysts

[SINGAPORE] Analysts continue to favour globally diversified equities, as the US Federal Reserve kept interest rates unchanged on Wednesday (Jun 18).

In its latest meeting, the Federal Open Market Committee (FOMC) agreed to leave the central bank’s benchmark interest rate unchanged in the 4.25 to 4.5 per cent range, citing a healthy labour market and reduced uncertainty in the economic outlook.

But the Fed also lowered its growth forecasts and raised inflation estimates, likely to account for the impact of higher tariffs.

Wall Street stocks ended largely flat after the Fed announcement, while Asia markets traded lower.

In Singapore, the benchmark Straits Times Index (STI) closed 0.7 per cent lower on Thursday.

Across the region, the Hang Seng Index fell 2 per cent, the FTSE Bursa Malaysia KLCI lost 0.7 per cent and the Nikkei 225 was down 1 per cent.

“Markets are mostly unfussed about FOMC, with only fractional moves all around. But this is just volatility suppressed, and geopolitics now rules the roost,” said Vishnu Varathan, managing director and head of macro research for Asia ex-Japan at Mizuho Securities (Singapore).

Varathan expects that the Iran-Israel conflict is likely to drown out Fed nuances as headline-driven instincts for risk re-pricing will dominate.

“But the unresolved tensions in Fed policy (likely) point to greater volatility in yields and the US dollar (re-emerging) down the road,” he said.

Views within the FOMC showed a bigger divide – while the Fed still projects two 25 basis point cuts this year, seven FOMC members expect no change this year, up from four in March.

Meanwhile, the number of rate cuts in 2026 and 2027 have been reduced to one each, from two.

Market volatility remains

Tai Hui, Asia-Pacific chief market strategist at JP Morgan Asset Management, said the Fed’s assessment indicates that the economy is in good shape, aligning with current economic data.

“However, trade policy, fiscal policy and unintended consequences of policies from the Trump administration are contributing to market volatility in the second half of this year,” he added.

Analysts recommend that investors stay diversified amid heightened uncertainty in the global economic outlook.

Hui continues to favour international diversification in equities and income generation from multiple sources including corporate credits, Asian fixed income and option overlay strategies to manage volatilities.

“Alternative assets, such as infrastructure and transportation, can also provide consistent income streams to investors,” he said.

Ray Sharma-Ong, head of multi-asset investment solutions for South-east Asia at Aberdeen Investments, also likes equity markets outside the US, particularly in regions with strong fiscal support.

This includes Europe and China, as their policy tools can help offset the negative impact of tariffs, while South Korea’s markets are supported by growth-oriented reforms, financial market liberalisation and improving corporate governance.

China’s equity market is also further supported by a multi-pronged equity market programme, Sharma-Ong said.

Meanwhile, fixed income markets are offering “compelling opportunities” for long-term investors as the Fed holds cash rates steady and the yield curve steepens, said Manusha Samaraweera, fixed income investment director at Capital Group.

He noted there are attractive yields and resilience in investment-grade corporates in defensive sectors – such as pharmaceuticals, utilities and European banks – as well as selective opportunities in high-yield bonds in the upper-quality tier.

“In our view, bonds are once again fulfilling their traditional role as portfolio stabilisers,” he said.

For rates, Aberdeen’s Sharma-Ong also prefers regions with strong monetary support such as India and China.

“These markets are less correlated to US Treasury yield pressures, which continue to be influenced by Fed uncertainty, inflationary dynamics and a rising risk premium,” he said.