Steven O’Hanlon, Head of Fixed Income at ACPI Investment Managers comments on FED announcement on tapering…
The impact of the Federal Reserve reducing its asset purchase programme will ultimately be significant; in many ways it will be like taking a teenager off their parent’s credit card.
Emerging markets, who have become reliant on this flow of money from the West, will need to introduce structural reforms to cope with the loss of this and the impact it will have on their economies. These reforms have been put on the back burner in many countries over the past few years, although if previous crises are anything to go by the capacity of many of these economies to reform is much higher than most Western governments. These changes need to be focused on developing infrastructure and promoting supply side reforms with less interference in terms of subsidies. The dynamic of high deficits needs to be broken with proper supply side reforms to banking, labour laws, infrastructure investment and dealing with corruption.
Overall, whilst there may be some issues initially, we think this is a great opportunity for emerging markets to reform their economies. They have never been in a better position to become a legitimate rival to developed markets due to their domestic growth stories.