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The Fed's 405% problem
Weekly investor research
23 September 2013
The past three months have provided a useful illustration of how Emerging Markets (EM) respond to external shocks from
developed economies. As in previous similar episodes, asset prices over-reacted, while fundamentals remained solid. Value has
been created in the process. Meanwhile, the Fed’s decision not to taper smashed the consensus view that the US is on track to
strong recovery and materially higher real rates. Still, most market participants and policy makers are unlikely to grasp the
reasons for the US economy’s weak performance until they acknowledge the role played by the 405% of GDP debt burden.