Weekly Buzz: 🌏 When the Fed cuts, the world takes notice

It's said that when the US sneezes, the world catches a cold. That notion also rings true when it comes to interest rates. The Federal Reserve's big cut in September has sparked a global easing wave, with central banks worldwide now following suit.

The global easing cycle kicks off

History shows just how varied these US rate-cut cycles can be – from the modest 75 basis point reduction in 1995 to the dramatic 500 basis point cuts during the 2007–2008 global financial crisis. That uncertainty is keeping the markets on their toes.

Emerging Asia has been particularly responsive to this trend. With inflation running lower than global averages, the region's central banks have more flexibility to act. The Philippines, Thailand, Indonesia, and South Korea have all moved to reduce their rates. Meanwhile, China went a step further, combining its cuts with broader economic stimulus.

Some are taking a more measured approach. India and Malaysia are maintaining a neutral stance, backed by their economies' solid growth. And in Europe, central banks are planning fewer cuts – they're keeping their guard up against inflation. It's a delicate balance: cut rates too quickly and inflation could surge again, but wait too long and growth might slow.

As an investor, what’s the takeaway here?

This new global easing cycle could boost investor confidence, particularly in emerging markets. When rates fall, capital becomes more accessible, stimulating growth across various sectors. Consider this environment an opportunity to review your portfolio's geographic diversification – a well-diversified portfolio helps protect against risk while capturing opportunities around the world, regardless of where we are in the economic cycle.

Take our General Investing portfolios for example. These portfolios provide exposure to markets worldwide, with asset allocations that adjust based on your selected risk level. Choose a moderate risk level (SRI 22%) and you'll get around 27% exposure to US equities, paired with 28% in international markets through ETFs covering emerging markets like India, and Japan. If you're comfortable with taking on more risk, the SRI 36% portfolio increases your global equity exposure significantly – to about 46% in the US and 47% in international markets.  

💡 Investors’ Corner: Why the markets aren't always rational (and what you can do about it)

In theory, stock prices should reflect all the information that’s out there. That would mean that shares are neither cheap nor expensive – everything is priced just right. But the markets aren’t perfect, and inefficiencies can creep in.

Consider when borrowing was cheap between 2009 and 2022. In that environment, investors started to take outsized risks and stock prices drifted from fundamentals as people placed bigger bets on anything promising decent returns.

Market inefficiencies can take many forms. In our hyper-connected world, where data flows 24/7 and prices can shift on a tweet, you might expect better access to information to make markets more efficient. But it sometimes has the opposite effect. GameStop is a prime example – its price spike was largely driven by social media momentum, not business fundamentals.

While riding trends can be tempting, fortune favours the patient. Short-term strategies like momentum investing (our Simply Finance below breaks this down) are prone to sudden reversals. That's why focusing on the big picture makes sense: over the long term, markets trend upwards, through the ups and downs.

These articles were written in collaboration with Finimize.

🎓 Simply Finance: Momentum investing

Momentum investing is a trading strategy based on the idea that assets that have performed well recently will continue to perform well in the future. Similar to a fashion trend, once a style gains popularity, people jump on board, driving demand.

Just as trends can fall out of fashion, momentum strategies can quickly turn against investors when sentiment shifts. During the dot-com bubble, many piled into tech stocks simply because they were rising, only for their investments to crash when momentum reversed. It's a reminder that what's popular isn't necessarily what’s profitable in the long run.