“One of the inefficiencies of the asset class arises from the fact that every time there’s a risk aversion event (in the developed world), investors have this irresistible urge to sell all their emerging market assets – this is truly insane,” he said.
Dehn said every single major risk aversion event since the Russian financial crisis in 1998 had been caused by the developed markets.
“Developed markets cause problems for everybody all the time. They make bad policies, they screw up, and the populists are a completely useless bunch of people and these guys think they’re risk free,” he said.
Dehn noted that when emerging market asset prices fell in most cases they recovered quite quickly because events prompting investors to reduce their holdings of riskier EM assets usually did not affect those countries.
"I would recommend buying during risk events every time."
“In terms of timing, I would recommend buying during risk events every time, including buying emerging market credits. However, as two or three emerging markets screw up every single year, don’t buy everything that gets cheaper,” Dehn added.
“If you buy during risk aversion events, given that 90% of emerging market credits recover, you get an incredibly good risk reward, probably better than what you get in most other circumstances in emerging markets.”
An example of the trend Dehn refers to can lead in the response to the US Fed’s latest interest rate hike of 25 basis points announced on Wednesday, which has seen the MSCI emerging markets equity index fall sharply (see graph below) while sentiment is also being affected by US trade war fears.
MSCI Emerging markets index 12-14 June 2018
When looking at the emerging markets index’s year to date figures, the concerns around rising inflation and monetary tightening in the developed markets along with growing prospect of protectionism across the world have pressured the MSCI index which has yet to recover from its peak in late January and the subsequent sharp selloff in February.
MSCI Emerging markets index December 2017 – June 2018
Commenting on the latest US rate hike, Rathbones Investment Management said the move could have an adverse impact on emerging markets and other risk assets.
Rathbones head of fixed income, Bryn Jones said: “The Fed will also issue $68bn (€57.7bn) of three, 10, and 30-year notes this week and it will be interesting to see how the market mops this up with another hike on the agenda too.
“Another Fed hike may see spreads widen further, despite reasonably attractive valuations right now. Could this provide an entry point?” Jones said.