As the Federal Reserve prepares for its next monetary policy meeting, the stakes are particularly high for global marketsWith inflation reaching a staggering 7.5% in January 2023, the highest it has been since 1982, market participants are eyeing the Fed's decisions closelyData suggests that there is a 100% probability of an interest rate hike at the March meeting, triggering questions about what implications this might have moving forwardTo understand this, we need to review the historical context of previous rate hikes and their impacts.

Historically, the Fed has undertaken three significant rate increase cycles in the last two decades: from June 1999 to May 2000, June 2004 to June 2006, and December 2015 to December 2018. During these periods, the U.Seconomy effectively operated in an environment marked by robust growth and rising inflation — a stage often characterized as an economic boom

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Such conditions fuelled an upward trajectory in financial markets, though it was also noted that initial reactions could include volatility following an announcement of rate changes.

When examining global equity markets, the inauguration of a new tightening cycle by the Fed typically results in short-term adjustments across major indexesEmpirical data suggests that, during these periods, the S&P 500 experienced drawdowns ranging from 5% to 15%, while indexes such as Hong Kong's Hang Seng Index and Shanghai Composite Index faced steeper declines, ranging from 15% to an alarming 30%. However, if one considers a more extended timeline, markets often recoup their losses as economic fundamentals improve, returning to an upward trend.

Focusing on the Chinese A-Share market, the early ramifications of a U.S

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rate increase tend to ripple through as emotional disturbances rather than a direct impactThe correlation between A-shares and foreign markets began to gain prominence only after the establishment of the Shanghai-Hong Kong Stock Connect in November 2014. A case in point is December 2015 when the Fed first increased rates; during this time, the S&P 500 saw a drop of approximately 13%. Interestingly, China's 10-year bond yields were on a downward trend, yet A-share indexes faced severe corrections, which were largely a result of fears stemming from the introduction of an equity market circuit breaker mechanism and concerns over the fundamentals following supply-side reformsIn this environment, the Fed's rate hike served as a catalyst for already frail market sentiment.

Fast forward to December 2016, when the Fed raised rates again; the backdrop had changed significantly

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Improvements in both macroeconomic and microeconomic fundamentals in China led to a more stable market demeanor, and the impact of the Fed's decision was markedly mutedBetween November 2016 and January 2017, the Shanghai Composite Index only dropped around 5% as the conditions had effectively set a more stable stage for equity performance.

From a long-term perspective, it is critical to note that the Fed's tightening cycle indirectly influences the A-share market primarily through Chinese monetary policyWhile there have been instances where monetary policies between the U.Sand China diverged, the overarching trend shows that as the Fed proceeds with its tightening, Chinese monetary policies tend to reflect a tightening tone as well due to global inflation pressuresSince inflation often manifests as a global phenomenon, synchronized cycles in inflation mean that when the Federal Reserve acts to reign in domestic inflation through rate hikes, it exerts pressure on China's monetary stance as well

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An uptick in domestic risk-free interest rates thus becomes a constraining factor on A-share valuations.

Examining the performance of various stock styles during previous Fed tightening phases reveals that large-cap, value-oriented stocks typically outperform small-cap growth stocksFor instance, during the period from May 2004 to August 2005, the ratio of large-cap stocks to small-cap indexes increased from 1.15 to 1.47, while the value-growth ratio moved from 1.10 to 1.18. Similarly, from December 2015 to December 2018, this trend continued, evidenced by the ratio of large-cap stocks rising from 0.44 to 0.82 and the value-growth ratio climbing from 1.24 to 1.84.

Looking ahead, even before the current tightening cycle is formally announced, markets have began to position themselves in anticipation of the implications on major asset classes, already reflected in movements over the past three months

A-shares, perhaps in response to geopolitical tensions and looming U.Srate hikes, have undergone some recalibration.

Future prospects for the A-share market remain cautiously optimistic, propped up by expectations of spring market ralliesTwo standout reasons feed this outlook: firstly, the stabilizing effects of policies aimed at fostering growth are becoming increasingly visibleThe People's Bank of China has previously lowered several key interest rates, and the year-to-date numbers for new social financing as of January reflect a surplus of 98.42 billion yuan year-over-yearSecondly, historical trends show that spring rallies have never been absent from A-shares over the past two decadesThe timing coincides with significant political meetings and a generally lower rate of data disclosures between November and March, which usually catalyzes a heightened risk appetite among investors at the beginning of the year.