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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?

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