latter. notwithstanding central bank efforts at anchoring long - term rate expectations, it seems difficult to imagine that a reduction in global liquidity – at a time when non - resident demand for us bonds, in particular, has been waning – would have no significant impact on us or core european yields. international estimates of “ term premiums ” embedded in longer - term bond yields did suggest that quantitative easing policies had compressed these premiums to unusually low levels ; in turn, as prospects for an unwinding of quantitative easing emerged, they started to normalize. furthermore, term bis central bankers ’ speeches premiums have shown some correlation across both developed and emerging bond markets, in particular since they began to rise from may 2013 onwards. 4. the case for ( still ) investing in emerging markets risks hanging over emerging market assets, however, do not mean that the case for investing in such assets is closed. first of all, while the growth out - performance of emerging countries relative to the developed world has been dwindling, this should not obscure the fact that the gap, while narrowing, remains positive, and that emerging markets remain the biggest contributors to global growth. demographic trends, productivity gains, increases in the stock of capital remain conducive to a stronger growth performance of emerging market countries in the medium to long term. even countries that have shown a relatively strong degree of convergence with living standards of the developed world can still out - perform the latter, as the case of korea and taiwan shows. similarly, emerging countries continue to display, on balance, better fiscal or external metrics than their developed world counterparts, whether one looks at current account balances, public deficits or ratios of public and private debt to gdp. rather than the developments following mr bernanke ’ s comments in may 2013 representing an “ emerging market crisis ”, as some may want us to believe, what is probably a more correct characterization of the developments is a correction or re - pricing in the wake of expected normalization of global monetary policy and uncertainty around the speed of such normalization. what seems to further underpin the emerging markets investment case is much stronger fundamentals when compared to previous episodes of emerging markets coming under pressure, such as in the late 1990s, or even more recently in 2008. substantial progress has been made in the last two decades towards more flexible exchange rates, reserves have been accumulated on a grand scale, fiscal positions are healthier than in many advanced economies, all of these making emerging markets overall

##ics countries are lower, in 2013, than similar estimates made in 2011. 3. the likely impact of declining global liquidity the impact of somewhat less favourable fundamentals has, of course, been compounded by concerns that the ample liquidity made available in recent years to fight the global crisis will gradually be withdrawn, perhaps in the not - too - distant future. the announcement by the us federal reserve in may that conditions would probably soon warrant a tapering of its asset purchase programme – which incidentally does not equate to a reduction in global liquidity, merely to a phasing down of additional injections – quickly resulted in a sharp rise in the risk premium embedded in most emerging market assets. since chairman bernanke first talked about tapering on 22 may 2013, the jp morgan index of emerging market currencies has lost 7. 5 per cent of its value versus the us dollar ; the emerging market bond index ( embi ) local currency index has fallen by around 2. 4 per cent at the same time as the embi - plus sovereign spread of us dollar - denominated debt over us treasuries increased by close to 100 basis points ; and the msci emerging market equity index has fallen by 4. 0 per cent, even as the msci world index of global equities continued to power ahead, gaining 6. 0 per cent over the period. what will happen, then, when global central bank liquidity starts declining in earnest? admittedly, the response to tapering talk since may need not necessarily be a guide to future market moves, as the reduction in the federal reserve ’ s asset purchases is probably by now discounted to a much larger extent than it was before chairman bernanke spoke to congress in may. to the extent that the fed does not again surprise markets, but instead manages to stabilize expectations embedded in the longer part of the us yield curve, for example via the continued and effective use of its forward guidance, the impact on the global asset price constellation could be more benign than it has been so far this year. but how much is priced - in, nobody really knows. nonetheless, the strong correlation seen since the second quarter of 2013 between the exchange rates and bond yields of emerging countries ( especially those seen as the most vulnerable to a reversal of capital inflows, because of more fragile domestic growth or external account fundamentals ) and us treasury yields, does highlight the vulnerability of the former to a further backup in the