The imminent selection of a new US Federal Reserve chair could stoke concerns of faster pace of interest rate rises and induce capital outflows from emerging markets, says an analyst.
The new Fed chair will be selected by the US Senate on Nov 3 and take office on Feb 3, 2018.
A change in the Fed's monetary policy towards a hawkish stance, denoting a faster pace in interest rate normalisation, could cause capital outflows from bonds and equities invested in emerging markets, said Komsorn Prakobpol, head of strategy unit at Tisco Economic Strategy Unit.
"If the US dollar appreciates quickly, this would be [a factor prompting investors] to sell assets in emerging markets, including bonds and equities in Thailand," said Mr Komsorn.
Thailand and other emerging markets are no strangers to capital flight. In May 2013, former Fed chairman Ben Bernanke hinted that the Fed's monetary stimulus programme, also known as quantitative easing, would come to an end. This triggered a spike in interest rates, which riled financial markets in emerging markets as foreign investors' search for yields led them to withdraw a chunk of their investments in favour of developed markets.
Emerging markets, including Thailand, were all hit and saw large capital outflows in both bond and equity markets, as well as currency depreciation. Those with bad economic fundamentals, such as Indonesia and Brazil, suffered the most on the back of high current account deficits.
US President Donald Trump has five candidates to choose from for the new Fed chair. They are Jerome Powell, a Fed governor; Kevin Warsh, a former Fed governor; Mr Trump's top economic adviser Gary Cohn; John Taylor, a Stanford economist and ex-Treasury undersecretary for international affairs; and Janet Yellen, whose term expires in early February.
"We expect that Mr Trump will propose the new Fed chair on Nov 3 to the US Senate, which will take two to three months to consider," said Mr Komsorn. "We believe Mr Powell, who is currently among the Fed's board members, has the best chance to replace Mrs Yellen."
If the new Fed chairman is Mr Powell, in line with market expectations, the equity market will react positively, as Mr Powell would support a gradual rise in the US interest rate, said Mr Komsorn.
But if Mr Trump proposes Mr Warsh or Mr Taylor, both of whom have hawkish monetary policy stances, this could cause volatility in global financial markets, forcing investors to revise their expectations of the Fed's rate rise timing, he said.
US dollar appreciation and a rise in US bond yields are likely if one of these two candidates is selected, which would in turn put pressure on emerging stock markets, said Mr Komsorn.
Investors are recommended to profit from Thai and global stocks as well as retain their cash holdings until the Fed's interest rate direction becomes clearer, said Mr Komsorn.
