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Sitting on a time bomb
Weekly investor research
07 September 2015
The gravitational pull from QE has lifted prices for developed market assets and depressed them in Emerging Markets (EM).
With fundamentals still much stronger in EM, investors in developed markets are in effect sitting on a time bomb ahead of
monetary tightening. The markets know it, hence the recent volatility. The ECB knows it, hence its preparation last week to
further ease policy. Even members of the FOMC know it, hence their inability to clearly signal the direction of travel. The
decision whether to hike is not a conventional one – after all, growth is modest and there is no inflation. Instead, this is akin
to an investment decision – incurring a small cost upfront in the hope of a higher payoff later. But does the high level of
uncertainty and an asymmetric payoff justify a move now?