(Bloomberg) -- From favoring Asian stocks and quality small-cap shares to betting on flatter yield curves, strategists are mapping out their best trade ideas after Federal Reserve Chair Jerome Powell set the stage for raising interest rates to combat the highest inflation since 1982.
Most Read from Bloomberg
A Nor'easter Approaching New York Risks Becoming a Bomb Cyclone
Powell Backs March Liftoff, Won't Rule Out Hike Every Meeting
Stocks Halt Rally as Bond Yields Spike After Fed: Markets Wrap
Astronomers Spot Never-Before Seen Object at 4,000 Light-Years Away
Scientists Identify Factors That Appear Linked to Long Covid
Some warned of further volatility ahead for global equities, especially high-priced technology shares, while others called for a stronger dollar and higher bond yields. U.S. stocks surrendered gains and Treasury yields surged as markets perceived Powell's comments as hawkish.
Here are selected comments on what's next for global markets following the Fed:
Favor Value Shares
"We look for market interest rates and equities to stabilize on the Fed news," said John Lynch, chief investment officer for Comerica Wealth Management. "Oversold conditions have been present in many respects, and we expect global cyclical recovery and gradually higher rates to be supportive of value, quality (profitable) small caps, and cyclical sectors including energy, financials, industrials and materials."
"Inflation-adjusted (real) rates will likely remain negative in 2022, enabling equity investors to discount record profits, growing at slightly better than historically average rates, near historic lows. Profit growth in the range of 8.0% to 10.0% should guide the S&P 500's march toward our fair value estimate of 5,000 for the index by year end."
Seek Shelter in Asia
"The better monetary backdrop in Asia could overall support Asian equities" even as the expensive loss-making growth stocks will remain "vulnerable as their valuations could be hit by higher rates," Jian Shi Cortesi, a portfolio manager at GAM Investment Management in Zurich said in emailed comments. "The inflation pressure is lower in many Asia markets, and interest rate will not need to be hiked as much as in the U.S."
Higher Yields, Flatter Curves
"Today's Fed meeting reinforces our bias for higher U.S. yields, a flatter curve and stronger U.S. dollar. The statement and particularly Powell's presser were quite hawkish: opening the door to 50-bp hikes and possibly hiking at every meeting," Wells Fargo strategists including Mike Schumacher wrote in a note. "Given today's hawkish surprise from the Fed, more curve flattening and USD strength seems in store in the near term."
"Fed funds futures price 31bps for March. Fade it. In our opinion, this is too much tightening, too soon. Instead, position for the market to price more tightening through May."
"Rising Treasury yields make it hard to find an excuse to look anywhere but the dollar in FX markets," said Simon Harvey, head of FX analysis at Monex Europe. "Despite being fairly noncommittal for the remainder of the press conference with regards to the timing, pace and impact of quantitative tightening, the damage has already been done in financial markets due to the commentary suggesting a steeper rate path relative to that of four rate hikes this year prior to the meeting in what was meant to be one of the plainer sailing Fed meetings."
'Less Bearish' for Stocks
"Today's Fed statement was largely as expected. Interest rate hikes are coming, and we expect a hike in March 2022," Jason Schenker, president of Prestige Economics, wrote in a note. "This is less bearish for equity markets than some had feared."
"Fed rate hikes are coming, but the Fed is likely to take a measured approach to avoid sharp market declines in equity and home prices. Nevertheless, a rise in interest rates is supportive of the greenback and bearish for bond markets."
Brace for Volatility
"The stock market is especially vulnerable to higher rates and the removal of the tailwind that the Fed's asset purchases have provided for the past two years," Chris Zaccarelli, chief investment officer for Independent Advisor Alliance wrote in a note. "We believe the economy will stay out of recession and the bull market in stocks will continue this year, but we are concerned that the volatility we have already witnessed this month will increase in the months ahead and would exercises caution in the near term."
Bet on Seven
"The January FOMC meeting reinforces our view that the Fed will likely need to hike more than the market is currently pricing," wrote Ethan Harris, head of global economics at Bank of America Global Research. "This should push rates higher across the U.S. rates curve & in a bear flattening bias."
"We still think the market will likely price six to seven hikes this year and encourage clients to position as such. We also expect the market will continue challenging the Fed towards a 50 basis point hike in March. If the market prices a 50 basis point hike in March we expect the Fed will follow it given their current 'humble' and 'nimble' approach to setting policy."
Buy Emerging Markets
"Emerging-markets can still outperform especially with the backdrop of the commodities boom," said Mark Galasiewski, chief Asia-Pacific analyst at Elliott Wave International. "I personally don't consider 2% interest rates to be high, the boom will continue for a long time and EMs are going to be growing in this period. I like the AFK ETF, I like South East Asia and LatAm, I like Thai and Indonesia exporters."
"This likely additional sell-off in Treasuries might well be combined with spreads tightening in EM," said Jean-Charles Sambor, head of emerging markets fixed income at BNP Paribas Asset Management in London. The world is gradually becoming a better place and EM high yield spreads are very cheap. We continue to have a contrarian view and think 2022 is gonna be the year of Asia HY spreads normalization."
Asia Credit Attractive
Asian dollar credits are better positioned than peers with China policymakers diverging from the Fed and notes are better able to absorb rising U.S. yields, says Elisabeth Colleran, portfolio manager for emerging market debt at Loomis Sayles & Co. "The inflation situation doesn't look that bad, the fundamentals and the corporates look pretty good" in Asia.
(Add charts throughout)
Most Read from Bloomberg Businessweek
Market Turmoil Is Ultimate Test of What's Real and What's Not
What Happens When Russian Hackers Come for the Electrical Grid
Pharmacy Workers Are the Pandemic's Invisible Victims
The Tragicomedy of Boris Johnson Enters Its Final Act
The Charismatic Developer and the Ponzi Scheme That Suckered San Diego
©2022 Bloomberg L.P.