The US Federal Reserve has finally decided to scale back its stimulus in a bid to normalize its monetary policy that has been ultra-loose since December 2008.

The move by the Federal Open Market Committee (FOMC) was unanticipated with most analysts and economists predicating a wait and see approach up until March of next year, given the transition in leadership with Janet Yellen chairing the Fed in January.

Yet, it seems the stream of positive data on the labor market and an upwardly revised GDP was convincing enough for a symbolic cut.

Certainly, current inflation in the US is subdued, below 2 percent, and some opinions might claim that the close to 30 percent annual increase in equity benchmarks this year look normal using varying indicators and metrics, however, as an inflation hawk, such decision is favorable under the premises of avoiding asset bubbles, inflationary pressures, debasement and credit misallocation.

What are the ramifications from such decision? Which asset classes will be impacted? And which regions will suffer? Are important questions that need to be answered? In my opinion, we can look at the near past for clues. In May and June, Ben Bernanke signaled that the Fed might opt out and the consequences included the following: (1) a spike in capital outflows from the emerging markets that have lost around 16 percent of their market capitalization,

(2) downward pressure on currencies, especially emerging countries that suffer from persistent deficits in their current and fiscal accounts, and

(3) a surge in interest rates, with the yield on the benchmark 10-year US note rising from around 1.6 percent to more than 3 percent by September that trickled immediately into higher mortgage rates. In my opinion, this highly volatile market activity will be repeated in the next couple of weeks and into 2014.

The huge liquidity from the Fed that overheated emerging markets since 2008, in a way concealing the problems each market has is no longer in place, thus, I expect this group of countries to suffer, as investors penalize them for structural deficiencies.

Most notable, India, Indonesia, Brazil, South Africa and Turkey are going to face weaker currencies, capital outflows and higher interest rates on their sovereign debt.

Monetary policy will be complicated between supporting currencies, encouraging economic growth and combating inflation, objectives at odds with one another and require different policy mixes.

As for asset classes, an implosion in the bond markets a’ la 2009-2010 might be around the corner, especially that normalization implies higher rates going forward and investors who buy today will have to discount their notes and bonds when rates eventually adjust upwards, simply a capital loss. In fact, sovereign bonds have extended their losses this year, with UK gilts, US treasuries and German bunds losing 3.9 percent, 2.7 percent and 1.6 percent. Investment grade corporate bonds have also lost 6.8 percent, the first negative outcome since 2009 when they registered a 9.7 percent loss.

Finally, it is important for Saudi banks to reshuffle their investment portfolios given the above-mentioned developments.

Even though, 61.7 percent of these investments are deployed domestically and around 75.7 percent of total investments are investment grade, lower medium-grade to non-investment grade investments bank-wide have risen by 21.1 percent Y/Y in 2012, reaching SR74.7 billion, which will surely require a mix of hedging and liquidation in order to reduce investment provisions that might materialize otherwise.

Domestic banks have to be reminded of the SR5.3 billion accumulated in investment provisions during 2008 and 2009 even if they are well prepared because the chain reaction have started and nothing can stop it!

— Tamer El Zayat is a senior economist at the National Commercial Bank.